Early strength fades as session advances, leaving major market indices sharply lower by the close. The Dow ($INDU) fell 180.51 points to close the session at 11,479.39. The S&P 500 ($SPX) lost 19.60 points to 1,278.60. The Nasdaq ($COMPQ) gave up 35.54 points to 2,416.98. Volume was extremely light with 985 million shares traded on the NYSE and 1.67 billion shares exchanged on the Naz. Market breadth was negative by a 9-to-22 and 9-to-20 margin on the Big Board and Naz respectively.

Financials led the way lower to start the week with Lehman Brothers (LEH) falling on comments found in the Wall Street Journal and mortgage companies’ Fannie Mae (FNM) and Freddie Mac (FRE) falling on bailout rumors. Further declines in oil prices and better than expected earnings from Lowe’s (LOW) kept declines from being even larger.

LEH shares fell 7.0 percent to a price of $15.03 after the Wall Street Journal reported that the financial giant could lose $1.8 billion in the quarter. This has traders worried that LEH will need to raise even more capital than the $6 billion is raised in June. Concerns about FNM and FRE needing a government bailout were a major reason why stocks suffered Monday.

FNM shares fell 22.2 percent to $6.15 with FRE shares down 25.0 percent to $4.39. Barron’s reported that the government will likely need to help the troubled companies at the expense of taxpayers and shareholders. Unfortunately, recent strength in financials hasn’t benefited FNM and FRE with FNM hitting a fresh 52-week low Monday. We can expect volatility to continue for these two stocks, but with their respective stocks now priced at levels equal to options just a year ago, it makes it tough using options to benefit from the volatility.

Economic news was on the light side Monday with traders looking ahead to Tuesday’s PPI data and a release on housing starts. The Housing Market Index for August remained at a record low of 16, matching expectations. This data is a sentiment survey for the housing sector and it continues to point to weakness in the sector going forward.

Oil prices eased back below $113 a barrel Monday, down 90-cents to $112.87 for the September contract. Fears about Tropical Storm Fay hitting oil installations in the Gulf of Mexico eased. However, over the weekend, an OPEC leader stated that the cartel might need to cut production at the September 9 meeting, noting that there was a million barrels of extra oil being produced a day.

Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site

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