Danger Will Robinson!

A quick note on the state of the market. As we saw in my January 26 blog, the market at that time was at a critical juncture with the major indices testing major support levels. Well, folks, today we’re right back down there and unless there’s a significant turnaround in the last hour of trading, we could be looking at a complete market meltdown.

Generally lauded by technicians as a leading market indicator, the Dow Transports, the DTX, has broken major support at 290. The VIX, the volatility index, gapped up over 12% today–also a bearish sign. The XLF (the financial SPDR) and the RKH (the Regional Banks Holdr) are both testing their all-time lows.

Apparently, the fact that Japan, the world’s second largest economy (still?), suffered the worst quarterly decline in 35 years along with the Empire State Manufacturing Index coming in at its all-time low didn’t help the already sour mood on the Street where most folks believe the stimulus package will do anything but.

So, what should we do besides wring our hands? My recommendation is to move your longs into cash, if you haven’t done so already. For the time being, cash is king. Gold is also looking very attractive and the gold ETFs have been stellar performers over the past couple of months. The most heavily traded pure gold bullion ETF is the GLD but the GDX which represents the gold miners is also worth a look. If you’re heavy into gold, I’d suggest a mix of both ETFs to reduce your sector risk.

The more risk tolerant can buy LEAP put options on the DIA, the Dow tracking stock, or the SPY, the S&P 500 tracking stock. Remember that an increase in volatility also inflates the price of options, so a bear-put debit spread (buying the higher strike and selling the lower one) would help to offset that. An at-the-money or slightly out-of-the-money bear-call credit spread can bring cash into your account. For most of the near-the-money strikes, options are very liquid on both of these instruments. (Note your broker’s margin requirements regarding these plays.)

That’s about it for now. Just wanted to give everyone this important heads-up.

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