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Historically, the middlemen in the sale of bearskins would sell skins they had yet to receive. As such, they would speculate on the future purchase price of these skins from the trappers, hoping they would drop. The trappers would profit from a spread - the difference between the cost price and the selling price. These middlemen became known as "bears", short for bearskin jobbers, and the term stuck for describing a downturn in the market.

Market Review

It sure looks and feels like a bear market. The iShares Russell 2000 Index (IWM) 75.06 is down 11.60% from the October 11, 2007 top at 84.89 in just under 6 weeks. As of November 21, 2007 it had declined 14%, before bouncing Friday November 23, 2007 off 73 on light after Thanksgiving trading. Interestingly, it needed to reach the 73 level to set off the double top that is forming from the July-October highs. If it turns down once again and sets off the double top formation with a close below 73, then the minimum downside measuring objective from the double top would be 60. In the meanwhile we are likely to see the oversold bounce extended for awhile, perhaps reaching near the 78 level before resuming its downward course once again.

The Volatility Indexes for the S&P 500 are just under 25, and just under 30 for the NASDAQ 100, and the iShares Russell 2000. The NASDAQ 100 is near the levels reached on August, but the S&P 500 remains lower. As yet, these readings do not appear to have reached the top.

The now rapidly declining interest rates as defined by the 10-Year Treasury note with a yield of 4.01% and the 30-Year Treasury Bond yielding 4.44%, the lowest in a year, are signaling continued risk aversion and a slowing economy.

As for the emaciated US Dollar Index (DX) cash, 75.054, it looks as if it will not be able to hold the 75 support level based upon the lower trading range established last Friday. It now looks as if we will have another dollar down leg. This would in turn be supportive for gold and the gold miners, which again now appear to be resuming their uptrends concurrent with the dollar decline.

CurrencyShares Japanese Yen Trust (FXY) 92.27. A noteworthy event occurred on November 7, 2007 when the Yen broke-out, gapping above the 88 level, and rapidly moving to 90 and then gapped higher once again to the 92 level. The implication here is that “carry trade’ participants are unwinding short Yen positions and repaying Yen loans that have been used as the source of much market liquidity in the last few years. This is not good news for Japanese manufacturers that have enjoyed an undervalued currency for some time. Currently overbought we will be adding this ETF to our IVOLalerts™ section below.

The NYSE McClellan Summation Index –663.13, our market breadth indicator offers little encouragement for the bulls as it continues to decline at a measured and consistent pace. It is considered neutral at +1000 and generally moves between 0 and +2000. When above or below these levels it indicates an unusual market condition. Bear bottoms are usually –1200, so it would appear from this indicator that we have some distance yet to travel.

Strategy

Continue reducing positions in economic sensitive US domestic consumer discretionary sectors. While currently oversold and due for a bounce they will most likely turn lower once again. The near term bounce would be an opportunity to sell any issues in these sectors. We can also expect to see a bounce in the oversold Chinese stocks, but they may hold up better when the selling resumes in US domestics. For seasonal trades natural gas related and the oil refinery stocks are also likely to begin showing relative strength.

Suggestions

iShares Russell 2000 Index (IWM) 75.06. The markets appear oversold and are likely to bounce in the near term. In the case of the IWM the bounce could carry it back toward the 78 level and may last a week or more. With a Historical Volatility of 26.94 consider this short-term trade.

DR: Oversold counter trend trade. Watch carefully as it may not last very long.

SU: On a close below 73 unwind.

• Sell IWM Dec 74 put IOWXV 1.935 IV 32.88 Delta .3783

In IVolatility Trading Digest™ Volume 7, Issue 37, Yellow Light, dated October 29, 2007 we suggested a put sale for the Western Refining Inc (WNR) Nov 35 put WNRWG at 1.00 with an implied volatility of 63.26 and a delta of .2581. Assuming that the put was not bought back before expiration it would have been assigned as the stock closed at 30.65 on November 16, 2007, the last trading day before expiration.

In this situation, you would have been assigned the stock at 35 and since you received 1.00 on the sale, your cost basis of the stock is 34.

Our original suggestion was based upon the announcement of a substantial investment by Kirk Kerkorian and his Tracinda Corp. in Tesoro Corporation (TSO) now 56.21. He said, “Tracinda believes that the fundamentals of the petroleum refining industry make it an attractive area for investment”. We wrote “What’s interesting is the timing. Currently high crude oil prices and weak product demand are squeezing refiner’s margins, measured by the industry standard crack spread. One analyst at Bear Stearns, said the bid was an ‘ill-timed purchase,’ due to weakening industry fundamentals. High oil prices and low gas prices have hit refining margins in recent months, despite refiners efforts to lower production and inventory levels to support demand. Kerkorian’s motivation may be to beat the hedge funds to the punch by buying while the fundamentals appear unattractive. Whatever his current motivation his actions are likely to put a floor under the refinery stocks.”

The floor did not hold and the stocks as a group have declined with the market and in a typical seasonal pattern. When the purchase announcement was made TSO was selling at 64.48 and has since pulled back to 56.21, in the area where it was trading before Kerkorian’s announcement.

If the fundamentals were good then they are better now as the crack spread, the measure used to estimate refinery profitability has begun to improve with now higher gasoline and heating oil prices.

Here are the new suggestions:

Western Refining Inc (WNR) 30.41. Historical Volatility 55.62

For the long stock positions of WNR from the November assignment:

• Sell WNR Dec 30 call WNRLF 2.00 IV 49.88 Delta -.5825
• Sell WNR Dec 30 put WNRXF 1.575 IV 45.46 Delta .4218

Then,

• Sell WNR Dec 30 put WNRXF 1.575 IV 45.46 Delta .4218

Net credits 5.15 Position net delta: Stock 1.00, short call –.5825, short puts .8436 (.4218 x 2) = 1.2611

Tesoro Corporation (TSO) 56.21. If the oil refinery business is as fundamentally sound as Kerkorian claims then we should be willing to be buyers at the October pre-tender price. Although the current price is 56.21, the Kerkorian tender is for $64 with an expiration date set for December 6, 2007. With a Historical Volatility of 63.37, and with a current Type II high volatility pattern,

Here are some suggestions:

• Sell TSO Dec 55 put TSOXK 2.95 IV 57.12 Delta .4117
  Or
• Sell TSO Dec 50 put TSOXJ 1.125 IV 56.84 Delta .2055

The alternative longer-term bull call spread:

• Buy TSO May 60 call TSOEL 6.30 IV 47.62 Delta .5111
• Sell TSO May 65 call TSOEM 4.70 IV 47.85 Delta -.4162
  Debit 1.60 Position net delta .0949

Harvest Energy Trust (HTE) 21.89. Harvest engages in the exploration, development, production, and sale of petroleum, natural gas, and natural gas liquids in western Canada. The company also engages in the refining and marketing medium gravity sour crude oil. Upstream oil and gas production is weighted 70% to crude oil and liquids and 30% to natural gas, and is complemented by a medium gravity, sour crude oil refinery, located in Come by Chance, Newfoundland with current crude capacity of 115,000 barrels (“bbl”) per stream day (“BPSD”). HTE currently pays a .30 monthly distribution, or at an annual rate of 3.60. At the current price this is a 16.45% return before the 15% Canadian Withholding Tax, or 13.98% after the withholding. With a current Historical Volatility of 44.17, consider one of these combinations.

• Buy 100 shares of HTE stock for the dividend
• Sell HTE Dec 22 ½ call HTELX .50 IV 30.71 Delta -.3926
  Debit 21.39 Position net delta .6074

In the event the stock does not immediately trade higher you keep the premium and sell another in January. If it does trade higher and closes above 22 ½ on expiration you will still earn a 5.19% return in 26 days or almost 73% annualized.

The longer-term alternative for the higher products pricing in the spring follows.

• Buy HTE May 20 call HTEED IV 32.87 Delta .7427
• Sell HTE May 25 call HTEEE IV 34.76 Delta -.2891
  Debit 1.825 Position net delta .4536

Solid Gold

With the Dollar Index (DX) resuming its decline it is time to return again to the gold miners.

Market Vectors Gold Miners ETF (GDX) 48.85. This ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. Currently the GDX is trading below its upward sloping trend line off the August 16, 2007 low, but is now turning higher once again with the declining dollar. Once it again crosses above, watch the trend line for support. With a current Historical Volatility of 47.24 and with a Type II high volatility pattern, consider this bull call spread.

• Buy GDX Jan 49 call GDXAW 3.30 IV 43.25 Delta .5326
• Sell GDX Jan 52 call GDXAZ 2.10 IV 43.03 Delta -.3944
  Debit 1.20 Position net delta .1382

Yamana Gold Inc. (AUY) 13.94. First introduced in IVolatility Trading Digest™ Volume 7, Issue 33, dated October 1, 2007, Yamana reported a 48% increase in gold production for Q3 and .20 per share earnings. Initially the stock traded higher but then retreated with the weak market. With a current Historical Volatility of 59.82, consider this synthetic long and call sale combination.

• Buy AUY Jan 12 ½ call AUYAV 2.125 IV 57.65 Delta .7359
• Sell AUY Jan 12 ½ put AUYMV .575 IV 57.40 Delta .2653
• Sell AUY Jan 15 call AUYAC .825 IV 54.43 Delta -.4233
  Debit .725 Position net delta .5779

IVOLalerts™

CurrencyShares Japanese Yen Trust (FXY) 92.27. As mentioned above the Yen break-out and gap above the 88 level, its rapid rise to 90, and its gap again to the 92 level is an important indication that perhaps the "carry trade" participants are unwinding their leveraged Yen loans. This is important as the Yen loans were the liquidity source for the off balance sheet mortgage financing fiasco. The rising Yen now would seem to confirm that these loan are being repaid, since the Yen would need to be repurchased in order to repay Yen denominated loans. Consider using the FXY for this situation. Go to Advanced Historical Data, enter FXY, and then take a look at the volatility chart. The trading volume looks sufficient and there is currently a 3.62 point positive volatility spread between the IVX Mean and the Historical Volatility. Now overbought we suggest waiting for the expected pull back to the 90 level one again before initiating long strategies.

Consumer Staples Select Sector SPDR (XLP) 28.54. This ETF includes companies in the consumer staples sector such as food and drug retailing, beverages, food products, tobacco, household products and personal products. Some examples are, Altria (MO), Coca-Cola (KO), Colgate Palmolive (CL), Kraft Foods (KFT), Pepsico (PEP), Procter Gamble (PG) and Wal Mart (WMT). As equity money comes out of the cyclical sectors some of it will be deployed into these consumer staple companies. Using long option strategies we can participate in this rotation process. Currently it appears to be somewhat overbought and due for a correction. We will add it to IVOLalerts™ and watch for an opportunity.

Consumer Discretionary SPDR (XLY) 33.55. This ETF is the inverse of the consumer staples as it includes companies from automobiles, consumer durables, apparel, hotels, restaurants, leisure, media and retailing. By tracking both the XLY and the XLP we can follow the rotation out of the discretionary sector and into the staples sector. Holdings include Amazon (AMZN), Home Depot (HD), Lowes (LOW), McDonalds (MCD), Time Warner (TWX) , Walt Disney (DIS) and others. While currently oversold and due for a bounce we will add it to IVOLalerts™ and wait for an opportunity to add a bear put spread.

Reader Response Request

Once again we encourage you to let us know what you think about how we are doing and what you would like to see in futures issues. Send us your questions or comments, or if you would like for us to take a look at a specific stock or ETF just let us know. Use the blog response at the bottom of the IVolatility Trading Digest™ page on the IVolatility.com Website.

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