Weekly Recap - December 12, 2008

The market finished the week flat, after having been up strong until Friday when the auto bailout failed to pass. Volatility has recently started to trend downward although it still remains at historically high levels. Investor sentiment appears to be improving, as bad news announcements seem to have less shock value. The fact that the market has declined over 50% since October 2007 highs lends support for an oversold market that might be ready for a trend reversal. As we have said before, there is no doubt that the economy is bad and that only time and government intervention can turn the tide. Next week will bring additional reports on industrial production, consumer price index, housing starts, and another round of jobless claims. The FED is also meeting next week and is widely expected to lower the FED funds rate to .5%. To date, the FED has been an active participant in helping to stabilize the financial markets. However, after the next cut, interest rates cannot go much lower so future FED plans will be of great interest as the FED has to find another way to help with economic recovery. The looming bankruptcy of General Motors and the auto industry bailout will also surely be a hot topic next week. Our speculation is that relief will come from either an agreement over the bailout proposal or perhaps administration approval to use TARP funds. We continue to believe that the economy has a long way to go and could be as long as year-end 2009 before improving. However, we also believe the market has reached a trading range bottom. Volatility is starting to trend down and the market has been resilient in resisting sharp drops over the past two weeks despite bad economic news. We think the market is starting to show signs of stabilizing, although it could remain very bumpy or even rocky over the next few months until volatility returns to normal at much lower levels.

For short-term investors, a bumpy market will provide many profitable opportunities on both the short and long positions as the market swings back and forth, within a 100 point trading range. We expect the market to swing between a trading range of 825 and 925 over the next few weeks. With that in mind, we may look to buy a call on the market index near 850 or below if the market swings sharply down and we can get in with a good price. If we can get in at good price, we will sell after the market swings back for a target gain of 30%. We will also look for additional opportunities for writing options, but will only consider those with exercise prices that are more than 10% from current market prices and with very short durations. Volatility is still too high, with daily market swings of more than 5% occurring frequenctly, which makes writing options very risky. In addition, we are still not ready to begin buying straight call options on individual stocks as the short term direction of the stock market is still volatile and difficult to predict, and the 3 month outlook very uncertain.