The relief rally was on today as the Dow zoomed 936 points as bulls rushed in to buy stocks that have been beaten down 50%-80% in just over a month. If you read the blog that I posted over the weekend, then you could tell how excited I was to go long the market. There were a ton of positions that could have been bought at the open this morning and it felt like I was going Christmas shopping on the Friday after Thanksgiving. That day is the biggest shopping day of the year as consumers rush to the malls at 4am to get the best deals. That is exactly what was happening at the opening bell this morning.

The Dow was up a quick 400 points right off the bat and its 11% gain was ithe biggest since the Great Depression. For the record, the Dow officially closed at 9,387. The “dead cat bounce”, “relief rally”, “oversold rally” or whatever you want to call it also pushed the S&P 500 and Nasdaq higher by 104 and 195 points, respectively. The S&P 500 closed at 1,003 while the Naz closed at 1,844.

But can the rally be trusted? The key point I made over the weekend was that you should only be looking out 6-12 months and it is hard to say if this rally will hold. However, today was our shopping day and here is what I had on my Christmas list from the weekend for my Lottery Play Portfolio.

Microsoft (MSFT, $25.50, up $4.00). If you’ve been reading the blog then you know how much I’ve mentioned this stock. This company has over $20 billion in cash and no sub-prime exposure. Share buybacks, dividend distributions, and acquisitions have eaten away at the company’s coffers - two years ago they had nearly $60 billion but the company’s products still generate about $1 billion a month. The stock fell to a low of $20.65 Friday. This morning, the April 25 calls (MSQDE, $3.30, up $1.30) opened at $2.35 and closed 65% higher for the day. Even at $2.35, you still got a 40% gain if you bought at the open. The April calls are over 6-months out and expire on April 17, 2009. If these calls get back to this level, don’t hesitate to jump on the. If you got in today with a half or full position then you could set 25% stops in case the stock retreats.

Google (GOOG, $381.02, up $49.02) turned out to be a “Blue-Light” special as it rallied 15%. This stock was on sale at half-off from its 52-week high of nearly $750 and the March 500 calls ($19.40, up $6.20) opened at $11.50 and briefly traded over $20. Google still has earnings so if you got in early, set stops at $15 or so.

Yahoo (YHOO, $13.49, up $1.20) fell below $12 last Friday and although it didn’t get the big pop Microsoft and Google did, it still managed a 10% gain. I didn’t go too far out on Yahoo call options because I still think the company is a mess (not taking the $33 a share from Microsoft still haunts shareholders). Remember though, we are not trading on fundamentals for some of these plays, just on what appears to be cheap. The January 17.50 calls (YHQAW, $1.33, up $0.06) were the most active but I don’t expect much from this one. In fact, set stops 20% below your entry price instead of the usual 50%.

Johnson & Johnson (JNJ, $62.68, up $6.83) was a no-brainer and a really safe play. The stock was up over 12% and I had mentioned the big drop after hitting a 52-week high a month ago. The November 60 calls (JNJKL, $4.70, up $1.70) opened at $3.30 as volume came in at 4x open interest. I love this stock for the short and long-term which is why the April 70 calls (JNJDN, $2.00, up $0.50) looked like a down-right steal at $1.50 this morning. If you missed today’s jump you could start building half-positions even at these levels.

I didn’t like General Motors (GM, $6.51, up $1.62) and still don’t although the 33% rally today was very impressive. We rode Ford and GM all the way down to these levels a few months ago and while there may or may not be bankruptcy in their future, I just think there are better trades out there. If you are a die-hard bull, the GM 2010 January 5 calls (WGMAA, $3.65, up $0.50) saw a lot of action as nearly 5,000 contracts traded. The 7.50’s (WGMAR, $3.15, up $0.65) weren’t nearly as popular, trading only 200 contracts.

Arch Coal (ACI, $27.32, up $5.28). The November 25 calls (ACIKE, $5.20, up $1.60) opened at $4.50.

Massey Energy (MEE, $26.47, up $5.74). The November 25 calls (MEEJE, $1.85, up $0.75) opened at $1.00.

Patriot Coal (PCX, $19.50, up $4.90) also made a nice comeback. The November 20 calls (PCXKD, $3.60, up $1.40) opened at $2.40.

There were a couple of other energy stocks I mentioned but I didn’t want to go too heavy on the sector.

Morgan Stanley ($18.10, up $8.42) was a huge story today after the company nearly went bankrupt last week. The investment bank went through a zany week of trading as many on Wall Street pondered its future. Mitsubishi Financial Group of Japan was the knight in shining armor for Morgan as they made a $9 billion investment in the company. The October 15 calls (MSJC, $3.80, up $2.61) were up 220% today.

Goldman Sachs (GS, $111.00, up $22.20) has made up 40 points since hiting a low of $74 last Friday. What a steal it was below $100 or even $80 for that matter. Remember, Buffett is in at $5 billion with another $5 billion waiting in the wings. The October 100 calls (GSJT, $15.50, up $10.00) opened at $6.95. An easy double as the day went on. If you bought at the open, set stops at $11.00. The January 125 calls (GSAE, $11.60, up $4.35) didn’t have the banner day as the October calls did but still were up 60% for the day.

There were a slew of other good trades, too many more for me to list but you got the idea. Keep an eye on some of the calls I have mentioned. They may get cheaper and they may not. It’s too early to call this a rebound and there is no way of predicting where we are headed over the next few days. Remember, earnings are on tap and they will certainly sway the market.

Rick Rouse
Rick@OptionsMentoring.com

Part of options trading has to do with “a gut feeling” and there are some trades you make based on what you really believe will happen. And there are some you don’t make because of that same feeling. For the past few months, we have done a lot of trades with financial stocks as we have bought call options on sell-offs and put options on rallies in hopes of riding the stock higher or lower.

Wachovia (WB, $1.84, down $8.16) was one of the stocks we played after it sold-off but for some reason I had a feeling Wachovia was in trouble and wasn’t going to bounce higher again. The stock was down 20% Friday and I mentioned the heavy option put buying as a reason not to go long. At the time, I didn’t think Wachovia would fall that hard, that fast but it has. The October 5 puts (WBVQ, $3.20, up $1.70) were going for 85 cents and hit a high of $4.50 when the stock traded as low as a penny. Wachovia shares did not open until much later in the trading session and when they did, the stock reached a low of $0.01. Wow.

The October 7.50 puts (WBVY, $5.70, up $3.20) stood at $1.50 on Friday when we went to press and they have also done well. The put option activity that was going on in Wachovia was a clear warning signal that something was up. In fact, it almost makes you wonder if Wall Street knew this was coming.

Most stocks go up when they are bought out. However, when the company’s not worth as much as its stock you will see these types of things. I was a big believer in Wachovia getting bought and that came true. Thankfully, I still did my research and knew about Wachovia’s trouble mortgage business.

Citigroup (C, $17.75, down $2.40) agreed to acquire Wachovia’s banking operations in a deal that was helped by the Federal Deposit Insurance Corporation. Citi got a great deal and will be able to expand its business while the FDIC could be responsible for loan losses. Sounds like a win-win for Citigroup as Wachovia’s shareholders are left holding the bag. Wicked game this Wall Street, huh?

Citigroup was actually positive at one point today but collapsed with the rest of the market when the $700 billion bailout failed. More on that Tuesday.

Rick Rouse
Rick@OptionsMentoring.com

Well, we all knew there would be drama when it came to getting the $700 billion banking bailout package approved by the government. Instead of fighting to get this thing done, both sides seem to be tripping over their own two feet to be the first in line to take credit for it. On Thursday, in what looked like a sure thing to get it passed, Republican lawmakers rejected the emergency financial rescue package last night after both parties pretty much had announced they were near an agreement on a deal. I guess that’s why they call it politics…

Anyway, as far as the market, we opened 150 points lower on the Dow this morning but as the day has progressed the market has rebounded but is still down 60 points. Part of the big drop at the open was news that the FDIC had seized Washington Mutual (WM, $0.16, down $1.53) on Thursday and then sold the assets to JPMorgan Chase (JPM, $44.30, up $0.84) for nearly $2 billion. Yeap, as Queen said it best…Another One Bites the Dust.

WaMu was the largest financial firm in history to collapse under the mortgage debt market and it shows just how serious the housing market has crippled our economy. Of course, the news isn’t earth-shattering by any means and it was almost excepted. WaMu joins the ever growing list of companies disappearing and I’m sure there’s more to come.

Wachovia (WB, $10.75, down $2.95) is getting a 20% haircut this morning as volume has hit 100 million shares. The options for Wachovia are also trading at a furious pace with huge positions being taken in the October 5 puts (WBVQ, $0.86, up $0.66, or 325%). Volume has swelled to 33,000 contracts thus far. The October 7.50 puts (WBVY, $1.50, up $1.05, or 233%) are also active. I’m not sure if Wachovia will trade down to $5 but there is growing open interest at the 2.5 through 10 October puts strike prices. We have traded Wachovia in the past but let’s stay on the sidelines with this one. Something doesn’t feel right with Wachovia anymore.

Change is good and and the way the market is acting it looks like it is smelling a deal. It still remains to be seen but we can almost bet the farm a deal will get done and that should help the market over the near-term.

Rick Rouse
Rick@OptionsMentoring.com

You know your stock has got to be “cheap” or “undervalued” when Warren Buffett steps in. That is exactly what happened after the market closed on Tuesday as Berkshire Hathaway (BRK-A, $128,800, down $2,200) announced it is investing at least $5 billion in Goldman Sachs (GS, $125.05, up $4.27). This is a pretty big deal and the market must have gotten wind of this before the final bell.

I had mentioned that some of the financial stocks were getting near our targeted areas yesterday and Goldman was quickly becoming my favorite one out of the bunch for a couple of reasons. First, best of breed. When it comes to owning an investment firm, Goldman tops my list. Secondly, Goldman Sachs (and Morgan Stanley) was one of the last two independent investment banks on Wall Street.

However, just two days ago both companies got the A-okay from the Federal Reserve to change their status to “bank holding companies.” This move gave Goldman broader access to borrow money and the ability to build a base of solid deposits.

Berkshire Hathaway’s investment in Goldman could double as the company also got warrants to buy another $5 billion in Goldman’s common stock. The first $5 billion is in Goldman’s “preferred stock” which will pay 10% and can be bought back by Goldman at any time for a 10% premium. The warrants allow Berkshire to buy $5 billion in common stock at $115 per share any time over the next five years. Goldman also said it would raise another $2.5 billion in its own public stock offering. Basically, Goldman just got the green light to print money.

The $115 tag is exactly what the shares were trading for when I did the blog yesterday. The point is not to toot my own horn but to let you know what is working in this market and what isn’t. The news sent shares of Goldman Sachs higher and the futures soared last night on a day the Dow posted another triple-digit decline.

Goldman reacted well in after-hours trading, up $9.70 to $134.75. That’s a 20-point move from lunchtime yesterday. The October 135 calls (GSJG, $6.90, up $0.10) traded as low as $3.80 yesterday. They will certainly see a big pop if last night’s gains hold.

Goldman Sachs’ shares had been falling at a rapid pace before the government announced its rescue plan. The bears were obviously targeting Goldman as they figured it would be the next General to fall during this financial war of bad debt. Now the question is if the SEC and/ or the government will have to look into Wall Street cashing in on our taxpaying money.

Here is what Mr. B said of the company…”Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”

Maybe the Geico lizard is showing up on Goldman early but rarely does Mr. B make a mistake. Especially one of this magnitude. You think he is risking $10 billion on a stock going nowhere? His favorite quote of mine is: “I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.”

Is that what we are seeing now? I mentioned back in August that September and October were historically bad months for the market and so far that has played out like Charlie Daniel’s fiddle. I’m not sure how bad October will be because no one has a crystal ball for the market. What I think could happen is a lower market into October and then a huge rally. And again, I’m just going by history and how this the market appears to be setting up.

I think once the details of how this $700 billion is going to be taken care of, the market will rally. And it could rally big-time. We also have the election which is usually bullish plus earnings season is right around the corner and we could get some surprises. Wall Street has lowered the bar so far that many companies could easily blow-away expectations.

As far as the other financial stocks, they rebounded as well:

Citigroup (C, $19.99, down $0.02) was at $18

Morgan Stanley (MS, $28.00, up $0.91) was at $25.36

Wachovia (WB, $14.75, down $1.85) hit a low of $14.01 but still ended lower by over 10%.

Of the three, Morgan Stanley looks to be the “safest”. Although risky, I think Morgan could ride Goldman’s coat tail on this one. Watch the Morgan October 30 calls (MSJF) this morning. They closed at $2.55.

Note: I gave a quote for Berkshire Hathaway’s Class A stock which is correct, it is currently going for $128,800 for ONE share but the Class B shares are a little cheaper…(BRK-B, $4,300, down $55.00) a share…

Rick Rouse
Rick@OptionsMentoring.com

The market has been moving slightly higher this morning as Congress debates the $700 billion financial rescue package for the troubled credit markets. Wall Street is watching like a hawk to find out the details and there’s a lot riding on how this thing is set up. The Dow is up 22 to 11,038 after rising more than 120 points in the morning. The S&P 500 is trading higher by 2 points to 1,209, and the Nasdaq is in the green by 5 to 2,184.

Our buddy Bernanke urged Congress to get this package through in a hurry and warned “the implications for the broader economy could be quite adverse”…perhaps the biggest understatement of the year. Look, Congress will make this thing work, no matter what the consequences because they can’t announce this big of a package and then not have it go through quickly.

The government is taking some steps in the right direction but the fundamentals for many of the bank stocks and financial institutions are still weak. Yes, there could be a “cleansing” of the books but there will be more pain before it’s full steam ahead.

The dollar is also rebounding today, while gold stocks are taking a breather after Monday’s big advance. Some of the financial stocks we follow are getting to our targeted areas again:

Citigroup (C, $19.15, down $0.87)

Goldman Sachs (GS, $115.94, down $4.84)

Morgan Stanley (MS, $26.84, down $0.25)

Wachovia (WB, $15.04, down $1.56)

If we can get another 10%-20% drop it will be time to go long again on some of these names.

Rick Rouse
Rick@OptionsMentoring.com