Turmoil

Traders Looking for Blow Off Selling

By Bryan Bottarelli
Tuesday, July 15, 2008 12:18 PM EDT
Tue, 15 Jul 2008 16:18:00 GMT

Dear Bottarelli Research Member,

I don’t think I’m exaggerating when I say that the markets are in a state of financial turmoil.

Never before in my life have I been more concerned about bank default than right now. And for that very reason, I spent the morning closing various accounts at my local bank.

In my view, it’s now too risky to have any cash holdings in a bank over the FDIC insured limit of $100,000. And if I could take a moment and add my own opinion, I feel that the $100,000 guarantee is far too low. After all, this guaranteed limit was implemented back in World War II. At that time, $100,000 was more than enough to live comfortably on. But in today’s marketplace, this figure is completely out-dated. Combine this miniscule guarantee with the credit and housing crisis, and we’re truly facing some unprecedented financial times.

Now I admit. Perhaps it’s fear-mongering on my part. Or perhaps its’ the way the Internet rapidly accelerates the dissemination of news flow that makes it feel like the sky is falling. But we cannot ignore the fact that banks are failing. I’m sure glad that I’m not FDIC Chairman Sheila C. Bair right now, that’s for sure. Times look bleak.

But on the other hand, what I described above could present us with a tremendous opportunity. Case in point, my Mother called me this morning to ask whether or not she should liquidate her mutual fund accounts. As a pure contrarian indicator, could this single call mark the near-term market bottom? After all, my Mom truly represents the mentality of the average, mainstream investor. And if they’re selling out, then we’re very, very close to a market bottom (my advice was NOT to sell, by the way).

INDU

As I’ve mentioned before, every analytical tool that I follow indicates that we’re severely over-sold. But lately, these readings have meant absolutely nothing — as the markets have sold off any attempt at an upside rally. In fact, as I write, the Dow has staged a strong recovery off its daily lows. Will this rally get once again sold off? Who knows?

But, I do know that this recovery has pushed both the HGX and ICE into positive territory for the day. Now, I cannot predict if they’ll continue to trade in the green throughout the session, but it does tell me that we’re seeing some buying activity at these current levels.

So for now, let’s sit tight and closely monitor how the markets behave. If we need to add more downside plays (like VIX, SDS, or DUG calls), we’ll certainly do that. Or if the markets stage a recovery, we’ll play a bounce in the best possible way that we can.

So until further notice, we’ll refrain from making any new trades. But I’ll be watching as carefully as ever.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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