The Crash of 2008

It's interesting to think these really are historic times. People will look back and reference this as the "crash of '08" just like people talk about the '87 crash. October seems to be the month for events to unfold historically and this time around it is no different. With the Dow 40% off it's highs from almost exactly a year ago it seems eerily coincidental.

I have been trying to do some research on previous bear markets and crashes to help me gain an edge going forward. I feel like this is a great opportunity to make money on a snap back rally since we are so significantly oversold. Friday was slightly encouraging as we rallied from 670 down to settle only down 128. This could have been because people did not want to be short before the G7 meeting over the weekend but it seemed fairly positive since more forced selling didn't come at 2:30 or was at least overcome by more buying into the close.

Looking at the dot com crash, it basically took 2 years and had 4 steps on the way down to retracing from 1500 down to 800 on the S&P 500. This time around it has taken only a year but still took 4 steps to retrace 1550 to 800. The month following retracement there has a been about a 10% move back up in the opposite direction. The fact that this move has happened so quickly and gone so far means there should be a massive rally around the corner, likely sparked by a government move. I personally think that the government should guarantee interbank lending, that would spark a huge rally, but at this time all they are saying they'll do will be to invest in banks directly which may not do much to inspire confidence.

Comparing the previous declines as well each time it reached a -70 oversold condition there was a rally generally for the next week or 2, we have reached that condition, as well as historic oversold conditions on the McClellan Oscillator and bullish percent index. Even with the late day rally the McClellan is at a -120 level up from -130.

The factor just comes down to time and with the Vix at all time highs it makes options trading very hard. I still bought some November calls on the DIA with the expectation that we see a 10% move in the next couple weeks which should offset any volatility and time decay enough to get a nice profit.

GE reported earnings which were in line and affirmed outlook for the year. This would have normally be big news but seemed to be ignored. I took a stock position in GE at 18.50 which has been a significant support level over the last 10 years. It also coincided with an oversold level which was ideal. Right now after hours it hit 21.50, if we see a rally I think it could see another 10% pop. My first target is 22.50 with a second target of 24. At the same time I sold an Oct 17.50 put since we will have time decay over the weekend and doubt it will finish in the money at all by friday, but who knows anything is possible. I think odds are in my favor which is why I took the trade. Waiting a week and hopefully getting 800 for it is an ideal situation but still makes me a bit uneasy having an uncovered put position. I could have done a covered call but I expect the move to be up so that seemed to not be a good play.

I think the Dow could get back to 10,000 in short order once we see some credit relief but I think 9,500 is a more realistic target.

Who knows if we saw a bottom, but lets hope history repeats itself again and it is profitable. :-)