This week 5 years ago marks the worst week in the history of the Dow after the blue-chips fell a staggering 1,874 points, or 18.2%.
On October 3rd, 2008, the index closed at 10,325 and ended Monday’s 10/6/08 session at 9,955 – a drop of 370 points. The next day the Dow skidded to 9,447 (-508 points) and on Wednesday the index closed at 9,258.
That Thursday, the Dow tanked 679 points to finish at 8,579. The selling pressure continued into Friday as the blue-chips sank below the 8,000 level to a low of 7,882 before a rebound to 8,451 by the closing bell.
We bring this up because some option traders are fresh to the game and may have never experienced a decline of this magnitude. If you have been around the block like we have, then you may have seen it all but when there is a correction, investors get nervous and they stay out of the market.
From high to low, the Dow fell from 10,325 to 7,882, or 2,443 points, in a single week. The top of the head math can easily see this is a stunning 25% spanking – in a week, or 5 trading sessions. There was a ton of money made by playing the short-side and you can check out our 2008 portfolio to see how we had numerous triple-digit winners during this time frame.
Our point is to remind you that we always need to be careful not to get hit by a bear bus, especially when volatility is high and money and zombies are involved.
We have a few trades in play as we enter what could be a very volatile week. We knew support at the open would be tested but it has held. There is also the chance the market breaks out to new highs if the zombies do come to an agreement this week and wind up doing a package deal that settles the budget battle, the debt-ceiling debate, and possible sequester cuts.
The head zombie always talks about creating jobs and 5 years ago he used the “shovel ready” rally to win the Presidential election. The shenanigans happening now in DC are so deep that we all may need shovels if these knuckleheads keep the stalemate going. We should point out that the zombies are scheduled for “recess” starting next week (October 13) so if no deal is done they will be working “overtime”, or, they will take their vacations. The latter will have major implications if nothing gets done.
The current 3-week trading range could carry through until the end of this week but it could also get “stretched” to the downside (or upside) as we have seen. We have said this is becoming a stock-picker’s market and one we thrive in. Despite the choppiness, we have a NEW TRADE we are getting into. We will be using November options for this trade as we build out our next batch of trades into yearend.
As we head to press, the Dow is down 99 points to 14,973 while the S&P 500 is lower by 9 points to 1,681. The Nasdaq is off 28 points to 3,779 and the Russell 2000 is declining 9 points to 1,068.
Subscribers, check the Members Area for the New Trade and current updates and we will be back in the morning with a full report. If we do take additional action today, we will send out a Trade/ Profit Alert so stay locked-and-loaded into the close.
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