I have been talking about the Volatility Index (^VIX, 74.26, up 6.62) on a monthly basis now and for those of you new to the blog, the VIX is the CBOE Market Volatility Index that measures market sentiment. The market has had a lot of downward momentum and when the market goes down, the VIX goes up. The value of the VIX decreases when the market heads higher.

At the end of September I had mentioned how the VIX had spent 10 trading sessions in the 30’s and looked poised to jump into the 40’s, which at the time was suggesting Wall Street was anticipating a dramatic price decline in the market. As we headed into October the VIX kept rising and we saw the market fall to a fresh low a few weeks later as the Dow hit 7,773.

The VIX hit a high of 90 once we bottomed and fell to a low of 44 right before the President election which is still high. For you history buffs, if the VIX is at 30 or more then it means the market is nervous. If the VIX is under 20, the market is confident. It’s not clear what the “new” standards should be for the VIX because the volatility has also been historic.

However, this week is getting worse by the trading day and we could see the VIX test its high. If that’s the case, be prepared for another leg down. If the VIX reaches 100 the Dow could easily fall below 7,500 which could trigger a massive sell-off

Rick Rouse
Rick@OptionsMentoring.com

The market is not out of the woods yet. U.S. elections will take center stage on Tuesday and many experts believe the outcome has largely been priced into stocks (meaning an Obama victory). The chatter this morning is that if the Democrats sweep it could pave the way for higher taxes. The spin on this is that it would not be good for the market.

The “big news” this past week was that the Fed lowered interest rates to 1% and world banks are lowering their rates as well. All of this is intended to stimulate a sagging global economy but we are looking at several quarters before we see any significant improvement. The problem has not been liquidity and the cost of money, but the willingness to lend is just not there. Investors and banks are hoarding cash.

Which leads me to the hedge fund industry. I’m not sure if this possible bomb is priced into the market but we better prepare for it. The industry is poised for a massive shake-up as investors demand the return of billions of dollars from both struggling and even funds that have posted positive returns. I’m hearing that anywhere from 750 to 1,000 hedge funds could be closing shop by year’s end. Yikes.

The squeeze on hedge funds from the credit crunch goes hand-in-hand with what makes many of them successful. If you recall, we had a recent ban on short selling instituted by the Securities and Exchange Commission as a result of the credit crisis which eliminates an important trading tool for hedge fund managers. The credit tightening itself also limits their ability to use credit to add leverage. While it’s not yet clear how many investors have submitted redemptions or will be liquidating their positions over the next few months, it is something worth watching.

The Dow is trading higher by 26 points to 9,350 a half hour into trading this morning. The index held support at 8,000 last week which was slightly higher than the 7,773 October 10 low. After an initial move down at the open, the Dow is looking to test 9,400-9,500 today.

A close above those levels would signal a new pattern of “higher highs” and could lead to a push towards 10,000. It has been hard to trust this market but it does appear that we might be carving out a trading range up until Thanksgiving. However, I wouldn’t go out and buy just call options. I still think its best to have both call and put options in your portfolo as some sectors look strong while others continue to look awful.

Try to buy put options on rallies and call options on declines like we did with the casino stocks. Also keep in mind that the volatility may have subsided for the time being but it will be back. The Volatility Index (^VIX, 58.43, down 1.46) is still quite high but has come down from a high of 90 as the market has rallied.

Historically speaking, if the VIX is at 30 or more then it means the market is nervous. If the VIX is under 20, the market is confident. It’s not clear what the “new” standards should be for the VIX because the volatility has also been historic. However, as I mentioned earlier, the market still has some issues that it needs to deal with before we can consider this a bull market.

Rick Rouse
Rick@OptionsMentoring.com

Words can’t describe the excitement we’ve seen in the market over the past few weeks and Friday was a classic example of what could be described as “running for the hills”. Wall Street was in full fledged panic mode Friday as the Dow went back and forth in a 1,000-point range, hitting a low of 7,882 and a high of 8,901.

The last hour of trading was a toe-to-toe battle between the bulls and the bears that left both sides bloody. It was awesome. By the final bell the market had mixed results as the Dow fell 128 points to 8,451, while the S&P 500 slipped 11 points to 899. The Nasdaq held its own and managed to finish in the green, up 4 points to 1,649.

The final score for the week was a clear victory for the bears, however, as they hit the Dow and S&P 500 for 18%, while the Nasdaq slid 15%.

As a result, a lot of companies went on sale, at least in my mind. More on that in a minute. While it is extremely hard to predict a market bottom, there are signs that at least we are getting close. I still don’t trust October but as bad as the month has been historically, it is often the best time to buy when looking at long-term stocks or options if there has been a correction.

Yeap, it’s gonna be hard to go long right now, but with a game plan you can advantage of everyone’s elses fear. Take a look at how some of these big names traded on Friday.

Microsoft (MSFT, $21.50, down $0.80) hit a low of $20.65. Are you kidding me? Back in April when Microsoft was trading at $30 did you ever think you would have the chance to buy it at $20?

Back in May, Google (GOOG, $332.00, up $3.02) was at $600. Yesterday it traded as low as $310. At half-price, is it a Blue-light special?

How stupid does Yahoo (YHOO, $12.29, down $0.36) look now for not taking Microsoft’s $30+ a share offer? Yahoo may not be worth $30 but it does look cheap at $12.

Johnson & Johnson (JNJ, $55.85, down $1.73) was at a 52-week high less than a month ago and hit a 52-week low of $52. Crazy. Just crazy, man.

General Motors (GM, $4.89, up $0.13) got chopped in half after after Standard & Poor’s Ratings Services said the company’s credit could drop further.

Energy companies have taken a whippin’ as oil prices fell 10% to a 13-month low of $78 a barrel. That’s the lowest its been in a year. Gas is going for $2.99 a gallon here on the east coast. Remember our Energy Watch list from June?

Arch Coal (ACI, $22.04, up $0.49) was at $70.

Massey Energy (MEE, $20.73, down $1.15) was at $84.

Patriot Coal (PCX, $14.60, down $0.23) was at $154. There was a 2-for-1 stock-split in August at $100. Still, the shares have fallen from $154 to $28 ($14 split-adjusted)? Incredible.

Peabody Energy (BTU, $28.65, down $0.93) was $77.

Joy Global (JOYG, $28.88, down $2.09) was at $85.

I profiled quite a few of them on June 4 and two weeks later they had returns of 100%-300% as the call options exploded when the stocks were hitting new 52-week highs. Click here to view these blogs.

The VIX (^VIX, 69.95, up 6.03) blasted through the 60’s and nearly hit 77. On Tuesday, the VIX was at 52 when I said that the 60’s look like a good bet.

The point I’m trying to make is that some stocks ran too high too fast and now some of them have gone too far to the downside. Somewhere in the middle is where they may be fairly valued but we are more worried about the options on these stocks, not the funadamentals. I still don’t trust the financial stocks but there will be some winners out there once the dust settles.

The credit crunch, President Bush, the press and the talking heads have scared the be-Jesus out of everybody and nothing seems to be working to restore faith in the market. Remember what I have said about not following the herd. Yes, the market is tanking and there’s more downside risk. But everybody needs to quit beating the horse. It’s already dead. Now is the time to start buying for 6-12 months down the road.

I’m working on a “Lottery Portfolio” this weekend and I will be picking some stocks and sectors that may be worth a gamble. The market is open for business on Columbus Day although banks will be closed. Right now Wall Street can’t see the forest for the trees and hopefully by doing a Lottery Portfolio, I will be able to show you the bigger picture.

Rick Rouse
Rick@OptionsMentoring.com

Wall Street was jolted again on Monday as the Dow was on the verge of its biggest loss ever. At one point, the index was down 800 points before a late rally helped cut cut the loss in half. Still, with the Dow finishing 370 points (3.6%) lower for the day there was no celebrating going on. The Dow closed below 10,000 for the first time since 2004 and ended the session at 9,955.

Just how bad was it? The advance/decline was 200 to 3,000. The drop below 10,000 was something we were expecting but the Dow cut through that level like a hot knife on butter, trading to a low of 9,525. The Nasdaq was hit the hardest as it dropped 84 points, or 4.34%, to 1,862. The S&P 500 gave up 42 points, or 3.9%, and closed at 1,056.

The signs have been there and although the $700 billion bailout package got approved, it has done little to help the market. The real number is not the $700 billion…it’s the $1 trillion paper loss for the market. That’s what yesterday’s loss wound up being. Add that to the $1.5 trillion from last week and you got a loss of more than 3x the bailout package. Good grief.

This whole thing is a mess and investors aren’t buying it. Countless number of people are giving up on the market and staying in cash. Everybody is looking at their retirement and 401K’s and seeing massive losses across the board. There is one thing I’d like to point out here. With 401K’s you get what you put into it. And that means managing your 401K. There are ways to protect your 401K through market meldowns. Most plans allow you to move money around on a daily basis and instead of being in the riskier funds, move your money into the “safer” funds. There aren’t many options to “short” your 401K (which sucks) but you can still protect yourself.

If you have an IRA and you manage the money yourself then learn how to short the market. Look, when people are panicking and the market is in a freefall, everybody runs for the exit. Most of the time playing the market often means going against the herd. Well, right now the herd is turning into a stampede which means we are getting close to capitulation.

We have been playing the downside for a couple of months now. In early September, I went out on a limb and played out a scenerio on how the market could act. I mentioned September and October were lousy months and looking back on things it has been the perfect storm.

From September 3:

“September is historically a “not so good” month for the market and October follows. And we all know that some of the biggest market crashes, ever, have happened in October. Anyone remember October 19, 1987, other wise known as “Black Monday”? That was the day the Dow fell over 500 points, or 22%, to finish at 1,739. A crash of that magnitude would be like a 2,500 point drop for today’s Dow. That seems a little far fetched, huh? Now, I’m not saying that the market is going to crash or that we are going much higher from here but it’s important to step back and analize things.”

From September 10th:

“The September 45 puts (QQQUS, $2.25, down $0.35) are down 13% but were profiled at $1.73) and traded at $2.60 earlier this morning. The October 45 puts (QQQVS, $2.78, down $0.19) were at $2.27 and have hit a high of $3.00. I just wanted to point this out because they have posted some decent returns. I feel comfortable holding them but selling half right now might not be a bad idea if the risks are too great for you.”

The September 45 puts have since expired but the October 45 puts (QQQVS) closed yesterday at $11! That’s nearly a 300% return in this market mayhem. And did you see how we rolled the September puts into the October put options?

I only bring these excerpts up because I want you to learn the market so so bad. Still, we have found room to play both call and put options based on the volatility we’ve been witnessing. It’s a trader’s market and that is what is making things so interesting for us right now.

In our options courses here at OptionsMentoring.com, we teach a lot of technical analysis, how to protect yourself from the market downturn and make some money at the same time. If you want to trade the S&P 500, we can show you how to do that too. Don’t panic when others are running for the hills. Do yourself a favor and learn the market. You can start by clicking here.

Okay, I’m off the soapbox now and I thought it would be a good time to mention what we do here at OptionsMentoring.com. Back to the market…

The VIX (^VIX, 52.05, up 6.91) was up another 15% yesterday and hit a high of 58. The market started to cut its losses after there was word that the Federal Reserve was going to step in but as you can see, the VIX was close to 60 like I’ve been predicting. I only repeat myself so that you’ll know what the maket is doing, how it is reacting and what you can do to prepare for these types of events. Let’s look at some more numbers.

Prior to 2003, there was the old VIX which was born in 1993 and tracks the S&P 100. That index is known as the VXO (OEX Volatility Index) and it also hit multi-year highs. That index hit a high of 66 and closed at 59.50, also a 15% jump. Now here is where it could get scary.

The old VIX hit 150 briefly during the crash of 1987. That was the bottom then and while I don’t think it can get that bad again, I’m not ruling anything out. There’s no quick fix for the market and earnings are going to have to be stellar to pull the market out of this funk. However, let’s watch for the “snap-back” rallies and if and when they do come, we will try and take advantage of them again.

Rick Rouse
Rick@OptionsMentoring.com

The Chicago Board Options Exchange Volatility Index (^VIX, 40.93, down 5.79) rose sharply on Monday as the stock market closed substantially lower.

The VIX measures “fear” on Wall Street and moves higher as the market moves lower. When Wall Street and traders get scared, they tend to trade more and volatility, along with the VIX, soars. When traders grow complacent and content, they tend to trade less and the volatility tends to trend lower.

As you can see, the market is higher this morning which means the VIX is trading lower. Yesterday’s jump marks the highest level of the VIX since 2002 and is only the fourth time the index has been this high. I had mentioned that the VIX could be headed for the 40’s a couple of weeks ago and now that we are here, we could go much higher.

The VIX spent 10 trading sessions in the 30’s and has now jumped into the 40’s basically overnight, suggesting Wall Street anticipates dramatic price swings in market. Although we are 52-week highs for the VIX, who’s to say we can’t head into the 50’s? If the bailout bill continues to drag, it will put even more pressure on the market to get something done.

Rick Rouse
Rick@OptionsMentoring.com

The Dow has fallen into negative territory once again after rallying over 200 points earlier this morning. Since its high of 11,800 at the beginning of the month, the Dow has fallen over 1,200 points with 800 of that coming this week.

I’ve been mentioning the VIX (VIX, 37.74, up 1.52) lately and for those of you new to the blog, the VIX is the CBOE Market Volatility Index that measures market sentiment. The market has had a lot of downward momentum and when the market goes down, the VIX goes up. The value of the VIX decreases when the market heads higher.

If the VIX is at 30 or more then it means the market is nervous which is currently where we are at. The VIX closed at 25.66 and the Dow stood at 11,421 last Friday. You can see the rise in the VIX as we headed lower on the Dow this week.

If the VIX is at 20 or lower then it means the market is confident. There are no real catalysts for the market to head higher until maybe when the election gets into full swing. It’s possible the VIX heads into the 40’s as we close out September and head into October. Company earnings will be coming out in a couple of weeks and you can almost bet we are going to see even more volatility.

Although the VIX is not a tell-all sign on where the market is headed, it can be a helpful tool. The market is not out of the woods and it will be interesting to see if we can hit the mid 40’s on the VIX. If this happens there will be plenty of opportunities to go long with call options on certain stocks and sectors.

Rick Rouse
Rick@OptionsMentoring.com

Out with the old, in with the new. There will be a change in one of the Dow stocks as Kraft Foods (KFT, $33.31, up $0.66) will replace American International Group (AIG, $2.40, up $0.35) as one of the Dow’s 30 components. The change will take place next Monday.

Well, it’s about time. Although AIG does not have a big percentage weight on the Dow (currently at 0.16%) now, it’s freefall in its stock price did have an affect on the market. Thank goodness they replaced it with a food company rather than another financial stock (sly grin).

AIG is being removed because of the Federal Reserve’s $85 billion emergency bailout. Kraft was a “safe” pick and if you will recall, spun off by Altria Group (MO, $20.53, up $0.67). It looks like Warren Buffett has done it again. He is Kraft’s biggest stakeholder and controls about 10% of the company. Mr B. has about, oh, 138 million shares worth a cool $4 billion. Wow.

The Dow is staying above water, up 61 points to 10,671 but a lot of technical damage has been done. The VIX (VIX, 36.68, up 0.46) has spiked above 30 this week and that is usually a good sign that we may be nearing a bottom. However, it’s quite possible that the VIX could headed to the 40’s if the market continues lower.

Rick Rouse
Rick@OptionsMentoring.com

The Dow pretty much gave back all of its 290 point gain on Monday with yesterday’s 280 point drubbing. The market was nervous after it was reported that Lehman Brothers (LEH, $7.79, down $6.36) had failed to attract a buyer for some or all of its assets and it only got worse with the sell-off in Energy stocks. The Dow made it into positive territory shortly after the open but was back in the red within the first hour of trading. The decline picked-up pace in the final hour and when it was all said and done, all three major indexes lost well over 2%.

The Dow finished Tuesday’s session at 11,230. The Nasdaq fell 60 points, or 2.6%, and ended at 2,209. The S&P 500 took a 3.4% pounding, dropping 43 points to close at 1,224. I said Monday morning before the market opened and the futures were up big-time that although we were headed for a huge rally, it appears traders are selling into them. That was confirmed once again yesterday.

Another point is that we all know triple-digit gains are pretty much the norm these days but have you noticed that we are now getting 200 and 300-point up and down days on the Dow. It’s almost gone unnoticed by the general public because everyone seems to be scared of the market or is not interested.

The fact that the market rallied on the Fannie Mae (FNM, $0.99, up $0.26) and Freddie Mac (FRE, $0.88, unchanged) bailout was our rally but it doesn’t set a good example. Without getting long in the tooth, who’s next? Will it be Lehman? Or will it be Ford Motor (F, $4.40, down $0.15) or General Motors (GM, $10.76, down $0.07)? I could care less about Lehman but why not grab the bull by the horns and give Ford and GM the incentive or cash to bring hybrid cars to the market quicker? The point is “the market can remain irrational longer than you can remain rational.”

Keep this in mind and don’t get too comfortable with any trades. The market could be setting up for an explosion to the upside or an implosion to the downside. Don’t forget we are historically in a lousy couple of months for the market (September and October) and something has to give. The VIX (VIX, 25.47, up 2.83) is heading towards 30 which could be when the bulls make their stand (or their last stand). I’ll talk more about the VIX over the next few days.

Rick Rouse
Rick@OptionsMentoring.com

The market has been on a roll and it’s been a while since I have mentioned the VIX (^VIX, 21.32, up 0.18). Those of you new to the blog, the VIX is the CBOE Market Volatility Index that measures market sentiment. The market appears to be building momentum and when the market goes up, the VIX goes down. The value of the VIX increases when the market heads lower.

If the VIX is below 20 then it means the market is confident which is currently where we are at, basically. The VIX was at 28.54 on July 15 and the S&P 500 stood at 1,214. If the VIX is at 30 or more then it means the market is nervous. The S&P 500 is now at 1280 and the VIX is below trying to get below 20. See the correlation?

Although the VIX is not a tell-all sign on where the market is headed, it can be a helpful tool. Since the mid-July spike, the VIX has been trending lower as the market gains confidence. There are still plenty of headwinds the market faces but the VIX has room to move significantly lower from here which means the market could continue higher.

The Dow was facing resistance at 11,600, and that level was broken yesterday with the Dow closing at 11,615. The volatility is going to continue but bottoms in the VIX have generally occurred near the 16-18 area. The VIX will need to make it below 20 if the rally is going to continue. Otherwise, this could be a bear market bounce that we are riding higher.

I have to give it to the bulls though. After a triple-digit loss to start the session, the Dow in only 8 points away from making it into positive territory as we head to lunch.

Rick Rouse
Rick@OptionsMentoring.com

It was an ugly day for the market as the Dow officially fell 394 points to close at 12,209. Oil was the main culprit once again as it soared over $11 to close just under $140 a barrel. A weak unemployment report didn’t help matters either. The Labor Department said the U.S. unemployment rate jumped to 5.5% in May from 5.0% in April. Wall Street was expecting a slight increase to 5.1%. Add it all up and it spelled trouble from the start. In fact, the three major indicies didn’t even make it into positive territory at all. Along with the Dow, the Nasdaq (2,474, down 75) and S&P 500 (1,360, down 43) both fell 3% as well.

I’ve been talking about key support levels for a couple of weeks now and here is a reminder: “For the Dow, a break below 12,000 could lead to 11,750. If this level is broken look out below. The S&P 500 would need to fall to 1,325 then 1,275 for the bears to start coming out in force. The Nasdaq has lower level support at 2,375 followed by 2,275. A break below 2,200 could spell trouble.”

Today’s decline was bad but if you’ll notice, the market has become very volatile which is a great thing for options traders. We’ve seen the Dow this week alone have four triple digit days of gains and losses. And expect more of the same as oil will likely continue to rise as well as the nation’s unemployment rate. Want reality? The unemployment figures were the largest gain in the government’s unemployment reading in more than 20+ years…

In early May when the market was rallying to new highs I mentioned the VIX (Chicago Board Options Exchange’s volatility index) was under 19. The VIX (^VXN, 26.04, up 3.19) soared 14% as the market plumetted. Tradionally, if the VIX is at 30 or more then it means the market is nervous and it was crystal clear that this was the case with investors today.

So are we headed lower? I could take a guess a say “yeah, we’re headed lower” but no one really knows what the market will do Monday. As far as the VIX goes, it was at 35 on March 17 when the S&P 500 stood at 1,276. I would imagine if either of these numbers are reached then, yes, we are headed even lower.

Rick Rouse
Rick@OptionsMentoring.com