Email – #426

The markets looked like they began another rollover last week. The upward momentum from early May seems to have fizzled, and many technical indicators are pointing to a rough patch in the coming weeks and months. Fortunately, most of our positions don’t expire until 2010 – more than enough time for a swoon to occur and a real recovery to begin. I still strongly believe that we will see the effects of the current Fed stimulus come into play in the fourth quarter of this year and the first quarter of the next year.

In the meantime, I want to take out some insurance in the form of a very inexpensive put option on the Nasdaq Index (Nasdaq: QQQQ) which has two things going against it right now. First, it is the seasonally slow season for technology, which is the largest component of the QQQQ index. Second, the QQQQ has very strong correlation with the S&P and DOW, which allows us to benefit from an overall market correction, if one occurs.

Here’s what you need to do:

Buy the QQQQ January 2009 $44 PUT options (OZC-MR). These are currently trading for $2.19. Do not pay more than $2.35 for these highly liquid options. If the QQQQ retests the lows it made this year, or even begins to approach them, we could see an easy double. If we see the QQQQ index break over $51, we will likely exit the position.