It was simply a case of "sell the news" on Friday.....but where was "buy the rumor?" Stocks rose nicely on Friday morning in anticipation of the bailout legislation passing the House of Representatives; but while the bill was being passed by the representatives, stocks hit their peak and then rolled over hard. Traders sold everything off heading into the close with the indexes finishing the week at their lows. This is never a good sign heading into the weekend.

There's no doubt that we've had credit drying up for the last two weeks among other pressure on the Market, but we believe that Friday's sell-off was caused more by politicians and the media fanning the flames over the last two weeks. After the public was hearing about the world coming to an end all week, it's no wonder everyone has been pulling money out of the Market and/or banks and burying it in their backyards. After all, it's been fear TV all day everyday.

Friday morning it appeared that it was going to be a nice strong finish to the week after traders shrugged off a disastrous non-farm payroll report. According to the Labor Department's data, employers cut jobs at a pace that we haven't seen for nearly five years when they cut 159,000 jobs in September. The number was quite a bit larger than the 105,000-job-cut that analysts had been expecting. This comes at the same time that unemployment has risen to 6.1-percent in August. The graphic below shows the trend of job losses that has occurred since June.

Graphic from briefing.com

Also on the day, the Institute for Supply Management reported that the non-manufacturing sector expanded in September. The data showed a figure of 50.2, which was slightly better than the 50.0 that analysts had predicted. However, this is down slightly from the previous report of 50.6. Any number of 50 or above shows expansion in the sector while below that means contraction. With the report continuing to hover around 50, it just shows the indecision of purchasing managers.

Crude didn't budge much on Friday when it only fell $0.08 on the session to $93.88 a barrel on the New York Mercantile Exchange. Meanwhile, the dollar had a huge week even though it ran into some resistance on Friday. The euro finished the week at $1.3806 while the yen was at $105.14.

Perhaps the most shocking news Friday morning was word that Wells Fargo was attempting to catapult Citigroup and purchase the defunct bank Wachovia. According to Wachovia, it was going to back out of the Citigroup deal in favor of the $15.4 billion offer from Wells Fargo. However, Citigroup convinced a judge Saturday night to temporarily block the Wells Fargo deal. It will be an interesting battle to watch, with plenty of litigation to go around. The good news is that it shows the Market that perhaps some deals can still get done out there even with the credit market turmoil.

With the House passing and the President signing the Emergency Economic Stabilization Act, traders will now look to see how fast the Treasury can implement its $700 billion experiment. While Secretary Paulson stresses that he will move rapidly to implant his new authority, the pace of action could certainly have an impact on the Market.

This weekend, there was an emergency meeting in Europe with leaders pledging to fend off any further bank failings on their side of the ocean. Leaders declared that they would come to the rescue of any other bank failings and would also continue to inject liquidity into their banking systems. This week traders will be watching for the decision from the ECB on Thursday as to whether or not they'll be cutting its benchmark interest rate. In the past, the European Central Bank has been reluctant to lower it due to inflationary risks. However, analysts believe that it will lower rates this week. There's also increasing speculation that the U.S. central bank might do an emergency rate cut ahead of its next meeting.

Today's Economic Reports

The Dow Jones Industrial Average couldn't hold to its gain that the index built before the vote in the House of Representatives. Once the bill passed, the index dropped like a rock and finished the day down 157 points at 10,325. For the week, the Dow shed 7.3-percent. Last week marked the seven out of the last eight weeks that the index had lost ground, certainly a trend that we don't want to see continue this week. On the chart, the next support level appears to be at 10,200.

The S&P 500 was also strong on Friday until the vote. Then it lost 15 points and finished the week at 1,099. It also turned in a very poor performance last week with a 9.4-percent tumble over the five sessions, its worst week since the Market opened after 9/11. There's plenty of old support levels on the chart for the index, but those have done very little to slow down this index over the last several months.

The Nasdaq Composite took a 29 point beating on Friday and closed at 1,947. The tech-laden index lost double digits last week when it dropped 11-percent over the last five sessions. As disappointing as anything is that it finished the week on its low. This is never a good sign heading into the new week. We're certainly going to need an outside force to turn this trend around.  

There was no slowdown in the VIX (Chicago Board Options Exchange Volatility Index) last week. It just shows that the fear is lingering, which is not a good sign for our put spreads. The VIX finished the week near Monday's high at 45.14. Keep in mind that this is very close to the indexes' all time high.

We went three for three last week with all of our spreads going under water. With all of them already facing enormous pressure after last Monday's sell-off, we felt that holding firm in these positions would give us the best opportunity last week. We felt that it was highly probable that we'd see a nice recovery once the bailout package was passed by Congress. Unfortunately it had little effect on the Market on Friday. Instead, all of our spreads felt even more selling pressure as the indexes turned south once again. The other thing that caused us to sit tight was the fact that we had three weeks left in this cycle, which meant that we had time to wait for the recovery. We are now down to just two weeks left in the October cycle. While we want to wait for a trend changing event, we also don't want to do nothing if things keep moving down. Our plan is to give it a couple more sessions before making adjustments in our spreads. Let's attempt to sit tight and see what plays out in the first two days this week.

We have a couple good spreads that we were planning on entering tonight, but the futures have been selling off big time. Because of this, we want to hold off too see what happens tomorrow before releasing the new spreads. If things settled down, we'll send out a new trade alert tomorrow night. For now, let's take a look at all of our positions.  

CURRENT OCTOBER SPREADS

MNX 160-155 BULL PUT SPREAD (15 contracts entered on 09/12/08)

$50.00 per contract profit potential (put spread)

The MNX wasn't able to hold on to its gain on Friday and finished the session at its low of the day. This resulted in a loss of $2.03 and left the index at $147.08. The MNX has been slicing through our support levels like a hot knife going through butter. This is a classic case of fear being the driving force. When this happens, we can throw everything else out the window. With two weeks left in this cycle, the index is now sitting around 13 points below our "short" strike price in this spread.

AAPL 125-120 OCTOBER BULL PUT SPREAD (15 contracts entered on 09/11/08)

$60.00 per contract profit potential (put spread)

Evidently Apple hasn't fallen hard enough for some speculators. On Friday, CNN posted a user's claim that Steve Jobs had a heart attack on its website. That report sent the stock down $10 in a matter of 12 minutes. Evidently CNN failed to verify the claim before posting it on its website. What a great piece of journalism by CNN that caused a $9 billion loss in Apple before the report was corrected. The SEC is now investigating the issue. Of course, we were already in trouble in this spread before this happened, but we certainly didn't need added downward pressure on the stock. With Apple closing down $3.03 at $97.07 on Friday, the stock is now nearly 28 points below our put spread.

RUT 650-640 BULL PUT SPREAD (10 contracts entered on 09/22/08)

$80.00 per contract profit potential (put spread)

The Russell 2000 sold off hard on Thursday and then made it back to back with another ugly session on Friday. The RUT shed 18.27 points on the final trading day of the week and closed at $619.40. The final two sessions of the week were very hard for our put spread with the index falling below both of our strike prices. Heading into this week, the RUT is now nearly 31 points below our put spread.

As always, Trade Happy and Trade Smart