SINL

by Bill Baker, J.D.
Editor and Publisher, SINL

We are all familiar with the equity market scenarios where all news, good or bad, somehow becomes bad news or the reciprocal where all news, good or bad, is somehow becomes bad news. For the past week we have been experiencing the all news, bad news scenario.

For example, both GOOG and GS reported fantastic earnings. Yet, the price of both stocks has fallen following their earning reports. During the past week, the news flow has turned decidedly negative. Bad news has been stacking up like jets on the runway at LAX during the Christmas rush. The equity markets have been range bound for the past two months. Now, equity prices are falling.

Here are 5 reasons for the decline:

1). Obama's banking reform measures are causing jitters on Wall Street.

2). The current term of Federal Reserve Chairman Ben Bernanke ends on January 31 and there is doubt that there are enough votes in the U.S Senate to extend his term as Fed Chairman for another 6 years.

3). EU Members Greece and Portugal are teetering on the edge of financial collapse.

4). There is apprehension that Obama may be just another left wing lunatic and not the deliberate, thinking, reasonable leader Americans thought they were voting for.

5). It is becoming clear that the financial stimulus package that has sunk the United States deeper into catastrophic debt, in the hope of reviving a dead economy, has failed.

That being said, are the markets heading for a major correction? Maybe. However, when it comes to investing, things sometimes have a tendency to zig when we think they are going to zag and vice versa. 

You can try to profit from this downturn by buying puts on the major indexes. On the other hand, when possible, you can try to identify the sources of the market downturn and focus on specific equities that will be most directly impacted by the problems.

Here's an example. Item 1 (above) pertains to Obama's banking reform measures. Basically, Obama wants to stop banks from engaging in proprietary and running hedge funds. He also wants to restrict the size of insured banking institutions. Obama's banking reforms will probably end up like his failed health insurance reforms. Between now and the time this latest Obama fantasy legislation fails there will be a lot of turmoil created by Obama's attacks against the banking industry and those who work in it. This turmoil will move banking related stocks as Obama's banking reform moves through the political labyrinth; one day being percieved as winning and the next day being perceived as losing

Three optionable stocks that will be directly and indirectly impacted by the Obama banking reform circus include, but are not limited to: GS, BLK, JPM.

You can set up an option strategy that will give you the opportunity to profit from a big downside or a sharp, sudden price spike resulting from unexpected price positive news.

As evidenced by the VIX, the equity markets may finally be breaking out of the range where they have been treading water for the past two or three months. This volatility will be good for option traders and, although the markets may initially trade down, bring more money into the equity markets.