Wed Mar 7, 2007: THE BEAR COMES OUT OF HIBERNATION!

After four years of rising stock prices on Wall Street, investors were shocked last Monday when the Dow plunged over 400 points, the biggest one-day drop since 2001. During the day at one point it was down more than 500 points.

In my opinion, this is now a new bear market with a long way to go, and investors hoping this was just a correction are going to soon be disappointed when the typical bounceback rolls over and the new downtrend becomes more clear.

In 2003 money market mutual funds were paying in the 1% range but today they are over 5%, which is a lot of competition for stocks. Extra money generated from housing equity borrowing was used to buy stocks and make large retail purchases, and extra spending from war borrowing also boosted earnings of many companies. I believe both of those positive liquidity factors will be decreasing over the next few years, hurting corporate earnings.

In my last commentary we discussed selling January 2008 calls on GOOG with a strike price of 520 at the then current price of 41.30 each. Now those calls are trading around 30, so that trade is working out nicely so far.

Over the next few weeks I'll be sharing a lot of bearish option ideas for making money from this fresh young bear market, so stay tuned.

Until next time, best of luck with your option investments!