Welcoming in 2009

My Forecast: Tactical and Otherwise

Dear Bottarelli Research Member,

I don’t know about you, but I’m counting the minutes until we put 2008 (which will go down as the third-worst year in the Dow’s history) in the books. In fact, when you consider the financial carnage on a global scale, you can easily make an argument that 2008 was one of the worst years in financial history.

Here in the U.S., the Dow, S&P 500, and NASDAQ will most likely post respective losses of -35%, -39%, and -42%. On a global scale, Germany’s DAX, Japan’s Nikkei, China’s Shanghai Composite, and Brazil’s Bovespa have respectively lost -40%, -42%, -65%, and -41%. Plus, in one of the most amazing reversals I’ve ever seen, crude oil will close out 2008 with a whopping 64% loss. Only gold, with a +4% gain, will close out 2008 on the positive side of the ledger.

As you can imagine, these crushing losses have really stung investors around the world. According to Forbes, 300 of the 1,125 billionaires that they follow lost at least $1 billion in 2008. Several dozen lost upwards of $5 billion. In fact, the 10 richest men of 2008 have collectively lost over $150 billion this year. America’s 25 wealthiest billionaires lost a combined $167 billion. But when it comes to the largest single-year loss, a man named Anil Ambani takes the cake. Last March, Ambani (who runs an international telecom company) had a net worth of $42 billion. But as we come to the close of 2008, Forbes estimates that is his net worth is down to $12 billion, good for a $30 billion loss in one year. This is the largest individual loss in the world. Ouch.

So when I say that I’m certainly ready to close the books on 2008, I’m sure that the world’s wealthiest billionaires and individual investors like us can all agree: It’s time to begin 2009.

As we get read to begin a new year of trading, I’d like to give you some of my thoughts going into January. First off, I don’t expect to see too much of a yearly gain/loss in 2009. If I were to guess, I’d say that the Dow closes down -10% in 2009. But that doesn’t mean that we won’t see wild price swings. After all, after a year like 2008, everyone across the globe will tighten their purse strings. Spending will be way down and frugality will take center stage.

At the same time, investors will all have a decidedly bearish bias. And when it comes to market psychology, this is very important. You see, when everyone is bearish, bad news tends to be accepted. In some cases, if bad news is not as bad as people expect, a rally can ensue. And then, if the news is actually better than expected (or even positive!) the markets will explode to the upside. With so much cash sitting on the sidelines, I fully expect to see this type of market action. But unfortunately, these moments of euphoria, in my view, will be brief. Then, as the sentiment turns negative again, you’ll see stocks giving up their gains just as quickly as they achieved them.

After all, coming on the heels of 2008, investors are very nervous about holding their positions. Therefore, if they catch a nice upside run and have gains in hand, you better believe they’ll be selling at the first sign of weakness. That means we’ll have a market that’s moving around a lot in 2009, but ultimately not making any significant move in either direction. From my eyes, this is the most logical and realistic forecast I can offer you going into 2009.

Given this scenario, the most profitable and effective way to play a market like this is by trading options. So, if you take nothing more away from this alert, just know that being part of Bottarelli Research is probably the best tactical position you could put yourself in heading into 2009.

Now, as I mentioned earlier this week, we have a multitude of powerful and exciting positions that I plan to take full advantage of throughout the 2009 investing year. As it stands right now, I’m most bullish on metals plays (particularly gold) and biotech companies. On the flipside, I’m most bearish on weak retail plays (notably JC Penny and Kohl’s), credit card companies, and U.S. Treasury Bonds, which are traded using the TLT. As cash moves back into stocks, I’d expect the TLT to fill the gap below the $105 level. More on this possible play in 2009.

There are a host of other enticing opportunities, such as:

• The current status of oil prices using the USO.
• The current low-water mark of oil service companies like RIG and DO.
• The recent bounce in oil refiners like TSO and VLO.
• The bullish upside thesis on beaten-down airline and trucking stocks (given the dramatic fall in oil prices).
• The major upside opportunity in exchange plays like ICE and CME.
• Political triggers for infrastructure plays like X, FWLT, FLR, and MDR.
• And a possible shift away from technology stocks like RIMM, AMZN, and AAPL, just to name a few.

Going into 2009, you better believe that we’ll fully capitalize on every major upside and downside trend in the most profitable way we can. And in that spirit, I couldn’t be more excited about what lies ahead.

In terms of house-keeping, let’s officially close out the 2008 trading ledger by selling our DUG January 31 Calls (DZG AE). Despite oil prices that are continuing to fall, shares of DUG have completely lost all of their upside momentum. Regardless of being on the right side of the falling oil-price trend, outside influences beyond our control have seemed to put the breaks on the profit-potential of DUG. This is very disappointing to me, especially since we isolated the oil price move correctly — yet the DUG did not move appropriately. Going forward, I’ll be very wary of playing ultra-short positions like this, knowing that a sudden cash disbursement can really cramp the profit-potential of the options string. Hopefully in 2009, ProShares will figure out a better way to handle this situation, because it’s obvious that the current system does not work.

But let’s keep things positive. All told, 2008 was a devastating year for most investors, but all things considered, I think our trading was very strong given the extreme market conditions. Going into 2009, I expect to do even better, and I’m glad you’re along for the ride! So on that note, have a wonderful New Year’s. We’ll talk again in 2009.

And as always…

Lock and load!

Sincerely,