The big news today is the testimony of America’s car industry as CEO’s of General Motors (GM, $2.60, down $0.49), Ford (F, $1.45, down $0.23) and Chrysler are pleading their case for a $25 billion bailout before the House Financial Services Committee.

The testimony is endearing and heated at the same time but the market is acting like the support is not there. GM and Ford shares are at fresh 52-week lows. GM says it could need $10-$12 billion but its CEO was squirming like a kid in church when directly asked exactly how much they will need to survive until March 31, 2009.

These companies are asking for a bridge loan but a lot of people in Congress are asking what exactly is on the other side of that bridge? The general consensus is that even if the bailout is approved, these companies are just delaying the inevitable which is bankruptcy.

While these companies may have been aggressively cutting costs, scaling back production, and putting in pay freezes, the bottom line is that they are simply running out of time. They may be reducing engine sizes and making smaller cars but they are not environmentally friendly. Until that happens, the auto makers are fighting a losing battle.

The big picture here is that if this bailout doesn’t go through and GM and Ford have to declare bankruptcy, it will not be good for the stock market. There are whispers the Dow could fall to 6,000 if that were the case but no one really knows.

This market can change direction on a dime which is why this is becoming one of the best environments ever to be trading options. The volatility could increase as the day progresses.

Rick Rouse
Rick@OptionsMentoring.com

It looks like the financials are getting close to being “rescued” by the government as both the Democrats and Republicans have made “tremendous progress” in negotiations over the $700 billion rescue for Wall Street. Let the debate begin on whether this is a good idea or not but it looks like it will happen over the weekend. In other words, Monday morning’s open could be huge. I say that with reservation but that is how the market should react.

There is so much riding on this package that many analysts believe that if this thing doesn’t go through then we are in big, big trouble. I’m not so sure of that because I believe there are many other solutions that would work that have not been heard. It’s just a timing issue and for the stock market it needs an infusion.

The market took a huge dive last Wednesday and Thursday as the Dow hit a low of 10,400 and was on the brink of a total collapse. Word of this bailout package helped stabilize the market and as you can see, if it fails, the market fails. Of course, the market still has a number of issues to work through and October is just around the corner. October has been the month where we have had some of the most historic corrections ever.

I’m leaning towards a rally but remain cautious as many investors keep selling into the rallies. If we can get a mini-rally for the market on the news of an approved bailout package then we could go long by buying options on any of the indexes. I prefer to use the PowerShares QQQ Trust (QQQQ, $41.52 up $0.66) when going long or short the market.

The October 43 calls (QQQJQ, $0.81, up $0.12) are up 17% this morning and could be worth a roll of the dice based on the belief the market will rally next week. It is clearly a lottery play.

Rick Rouse
Rick@OptionsMentoring.com