Sam Collins

Options Expiration Adds Volatility

by Sam Collins   11/21/08

Yesterday's heavy selling, which again accelerated in the final half hour of trading, took the S&P 500 (SPX) to its lowest level in 11 years -- down almost 52% since Oct. 9, 2007. The lack of an agreement on an emergency loan package for the auto makers, along with heavy jobless claims, was blamed for the latest sell-off.

General Motors (GM) plunged to new lows in the morning but then recovered and closed at $2.88, up 9 cents. Concerns over possible bankruptcy led GMAC to apply to become a bank-holding company and thus be eligible for emergency cash from the government. Ford Motor Co. (F) closed at $1.39, up 13 cents.

Even General Electric (GE) hit new lows, closing at $12.84, off $1.61. GE now has a dividend yield of 9.66% -- its highest in decades. And every member of the Dow 30 (DJI) closed lower yesterday except GM, ironically, as the index hit a new low along with the other benchmark averages.

At the close, the Dow Jones Industrial Average (DJI) was off 445 points to 7,552, the S&P 500 (SPX) lost 54 points to 752 and the Nasdaq (NASD) fell 70 points, closing at 1,316.

The New York Stock Exchange traded 2.2 billion shares, with decliners ahead by 15-to-1. On the Nasdaq, 1.4 billion shares traded and there decliners outpaced advancers by 6-to-1.

Crude oil for December delivery fell $4 to $49.62 a barrel, its lowest close since May 2005, and the Amex Energy SPDR (XLE) lost $5.64, closing at $39.96.

The December gold contract rose $12.70 to $748.70 per troy ounce, and the PHLX Gold/Silver Index (XAU) closed at $70.08, down $1.83.

What the Markets Are Saying

After holding at the S&P 500's (SPX) support at 840 for almost seven weeks, Wednesday's broader-based sell-off drove prices through the S&P's support, and yesterday another late-day flood added conviction to the selling by extending the distance from the breakdown through the lows of the bear market of 2002-2003. Volume was the highest since Oct. 10.

Technically, the next support for the S&P 500 was the Oct. 9, 2002, closing low of 777, but that was taken out yesterday when the S&P 500 plunged to the lowest intraday level since 1997. The next target is around 692, but at this point emotion is in charge and deriving a plausible estimate is just not possible.

Now with the internal and sentiment indicators very oversold, it is likely that a meaningful and dramatic reaction rally could develop -- even one that could take prices close to or even above the breakdown at S&P 840.

It is time to keep stops on any UltraShort Exchange-Traded Funds (ETFs) very close in preparation for such an event which in one or two hours could wipe out hard-won profits and even result in losses on new positions. But if the selling continues, we'll want to continue to hold the short ETFs since they are one of the few hedges against what has become a perfect storm of mass liquidations.

Today's Trading Landscape

Earnings to be reported: A/S Dampskibsselskabet Torm (TORM), AnnTaylor Stores (ANN), Canadian Solar (CSIQ), H.J. Heinz Co (HNZ), J.M. Smucker Co (SJM), Kirkland's (KIRK) and LaPolla Industries (LPA).

There are no economic reports due today.

The opening looks to be higher but today is options expiration day, and anything could happen.

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Sam Collins is a registered, fee-based portfolio manager who may be contacted at samailc@cox.net. You can also check out an archive of some of his most recent market outlooks by clicking here.