Now It's a Fight!

1. DOC'S THOUGHTS: Now It's a Fight!

Dear Fellow Options Insider,


At this time last month, the bulls were bedraggled and beaten down, and
it was obvious that they didn't have much fight left in them thanks to the
markets and the bears overwhelming them.

The bulls had pulled back and
none among them was stepping up to fight the trend, especially with the Dow (DJI)
trading near a 10% correction. Every time the bulls felt the pressure coming
from the bears, they pulled back their bids and we hit a vacuum, or freefall.


At the time, I pounded the table, saying the bulls would not make a
stand until we hit that 10%-down level -- that would be when we'd see a fight.
Until then, the bears would prowl and growl and drive the market at their whim.


The bears demonstrated clear dominance during the first part of August,
spreading rumors of "this" homebuilder or "that" financial stock filing for
bankruptcy. The Street was overflowing with blood, as the bears tore their way
through Beazer Homes (BZH),
Countrywide (CFC)
and E*Trade (ETFC).


But when we hit that down-10% level in the Dow, a funny and very
predictable thing happened: The bulls made a stand. The bears pushed and the
bulls pushed back!

The result was that the bears, who had become
overconfident, were stunned that the bulls were making a stand. The S&P 500
(SPX)
rallied, as did the Dow. And the Nasdaq-100 Trust (QQQQ)
rallied dramatically, as the bulls turned an extremely bearish 2.7-to-1 put/call
ratio around to finish with a 1.9-to-1 ratio.

AN EVENTFUL OPTIONS
EXPIRATION DAY

On Friday, Aug. 17, just as the bears were licking
their wounds, Federal Reserve Chairman Ben Bernanke helped the bulls to start
the day off with a smile when proved he truly understands the markets. He and
the Federal Reserve Open Market committee greeted the day by making a
50-basis-point cut in the discount rate (i.e., the rate at which the Fed lends
money to banks), taking it from 6.25% to 5.75%.

This was ingenious for
three reasons:

1) It left another 50 basis points (or, a half-point) on
the table if he needs it for a future cut.
2) The Fed Funds rate is still in
play and the powder here is still dry.
3) The timing of the cut hit the
bears right in the solar plexus, or maybe just below that!

The timing
was indeed key, because if the Fed had announced the cut at 3:30 p.m. (with a
half-hour left in the trading day), the markets would have rallied into the
close and everyone would have talked about it all weekend. But coming as it did
-- before the markets opened -- the cut in the discount rate crippled the bears,
as their expiring August puts vaporized and short calls exploded.

This
move cannot be oversold. The hit was not one that you can trade your way out of.
The hit to those expiring August options was a crushing blow that changed
sentiment. The put/call ratio in the S&P 500 options reflected the lift in
the bullish camp, as it closed out the day at 1.6-to-1. Although the bearish
camp still came out ahead via the put/call ratio, their lead was dwindling --
showing how dramatically sentiment has changed as the playing field started
becoming more-level.

This is not to say that the market turned bullish.
Actually, the market turned neutral, but at least it set up the stage for things
to become a fair fight!

HOW BADLY DID THE BEARS GET BITTEN?


I did some rough numbers on the expiring August S&P 500 options,
both calls and puts, and came up with some very interesting statistics:


There were 339,000 calls and upward of 1.2 million puts that expired on
the opening print of the SPX that Friday morning (as index options cease trading
a day before equity options settle).

This didn't include every single
call and put with an August expiration date, but it encompassed the meaningful
calls and puts that had both trading volume and some sort of value greater than
a penny.

The calls increased in value dramatically, and the puts either
lost value or were vaporized by the rally.

* The settlement for the SPX
was 1,450.11.
* The prior night's close was 1,411.26.
* Thus, the gap
settlement was 38.84 points higher than the close.

This simply means any
in-the-money put option lost either all of its value, or up to $38.84, while the
calls -- even those that were way, way out-of-the-money -- finished
in-the-money.

WILL BIG BEN MAKE A REPEAT PERFORMANCE?


Here we are on the eve of September options expiration, and we've got a
double-whammy in that the Fed is meeting tomorrow. So, two events that already
make for volatile trading conditions are coupling up to make Wall Street brace
itself for Big Ben's next move.

The Fed Funds rate is in play, and this
week's trading activity is practically dependent on the Fed's decision to either
leave the rate unchanged at 5.25% or to cut it by a quarter-point or half-point.
The dropping of the discount rate was positive for trading on that fateful Aug.
17 day, as the Dow closed up 233.30 points. Could we see something similar
before September expiration arrives?

So, what will come out of
tomorrow's FOMC meeting is anyone's guess. But the Fed Funds futures are
predicting that a cut of some kind, rather than none at all, will be made
tomorrow. And if so, the bulls will have won yet another significant battle over
their bearish opponents!

3. WEEKLY TECHNICAL FORECAST: Market Makes the Grade -- by Sam Collins


Just prior to Friday's opening, things looked pretty grim, with the
subprime issue rearing its head again. It came in the form of a bailout for
another institution by the Bank of England and a report of lower-than-expected
August retail sales figures.

Within 10 minutes of the opening bell, the
Dow was off 80 points with sellers clearly in charge. But the monthly survey of
consumer sentiment by Reuters/University of Michigan was unexpectedly strong
and, with that, the market began to turn up.

Friday capped off a good
week for the stock market (in fact, the best since April) with the Dow
Industrials (DJI)
up 2.5% for the week, the S&P 500 (SPX)
up 2.1%, and the Nasdaq (NASD)
up 1.4%.

On Friday, the Dow gained 18 points to close at 13,443. The
S&P 500 was slightly ahead at 1,484, and the Nasdaq gained over a point at
2,602. Today, the major indices closed slightly down, with the Dow dropping
nearly 40 points, the S&P losing 7.6 and the Nasdaq dropping 20.5 -- no
doubt as traders anxiously await tomorrow's Federal Open Market Committee
meeting.

With consumers still confident, but retail sales down just a
bit and unemployment slightly higher, it is expected that on Tuesday the Fed
will announce at least a 25-basis-point cut in interest rates and maybe even as
much as a 50-basis-point cut.

Despite heading into zones of heavy
resistance last week, stocks had their best week in months, even in the face of
some sobering economic pressures.

The subprime mess, though not in the
foreground, is still with us. Further, oil climbed above $80 for the first time,
the real estate markets are in a shambles, and the U.S. dollar hit a new low
last week. So, relative to the overall news, the market is behaving very well --
in fact, I give it an A+.

Sentiment is still positive, i.e., the
insiders are still buying while letter-writers are negative. And longer term,
that's good.

Only the public, as measured by the American Association of
Individual Investors' numbers, has cast a short-term cloud on trading: Last
week, individual investors went bullish by 40% versus 35% bearish -- the first
reversal there for many weeks.

The public's numbers may be telling us
that the inverse head-and-shoulders patterns on the major indices will now run
into some short-term difficulty. But with the other indicators positive, it is
likely that after a brief respite the advance will continue.