The S&P 500 made it all the way down to the 1440 level by Monday’s close, including another end-of-day 20-point waterfall downturn, just like Friday. As you probably recall, 1440 was a very important level on the way up, and it is especially important on the monthly chart. If the S&P breaks 1440, the next stop down on the monthly chart is 1326.

But when I recommended the put protection using S&P Depository Receipts (SPY) in last week’s Flash Alert, my real worry was that we would see 1326 in a matter of days. Although we’ve had quite a decline, the market has side-stepped a Crash so far. It would be very unusual to go through 1440 easily, and it is far more likely that the S&P will run back up to test 1490 from underneath. With the puts approaching expiration, a 50-point upswing would take away a lot of your profits. So I want you to sell the SPY puts immediately.

There is a chance that this current weakness in the market could extend all the way down to 1405, but that is a longshot. Even it if did happen, the turnaround and slingshot back up would probably be so sharp that it would be difficult to get out of the puts gracefully.

If you are a daytrader, you could wait for an hourly close over 1455 to chase you out of the put position (or whenever within the hour it is obvious that the S&P will close at that level or higher). If you don’t get chased out, you would then have to watch for a clear breakdown under 1435 to confirm that another leg down is beginning, and then be on the alert for a spike down to or near 1405 to cover. All of this could happen in one or two days. But 99% of you don’t want to play that game — this is not a trading newsletter — and I’m not going to follow that path in print.

It may seem like I am getting too cute here, but I am just watching the market pattern unfold and trying to keep my biases out of it. I’m no longer seeing the kind of weak pattern that I saw last Tuesday that led me to recommend the puts. If the S&P 500 can break 1490 to the upside, then the market should be able to move higher now and this little dipsy-doodle will be forgotten. If it goes up to 1490 and fails, it will quickly fall back to 1440 again for yet another test. If you are a trader, you could try to catch that drop and re-enter the puts. For the New World Investor portfolio, though, unless I see a lot more weakness developing, I am going to assume the market is in a 1440 to 1490 trading range until it tells us what it wants to do next.

I still think the S&P will be much higher by the end of the year, but we may have entered a new downtrend phase in the market. If so, I will not hesitate to recommend put protection again. Just in case I recommend puts again, I’d like to address a number of questions about this trade that I received from subscribers. I’ll also repeat some of this info in any future Flash Alerts involving downside protection.

Sam asked: “As per your recommendation, I did buy a couple of puts of SYHWT, which expire on Nov 16, 2007. What do you suggest that I do– sell the puts before the close of 11/16? Please advise.”

If the market still looked as bad as it did last week, I would have no problem holding the puts until Friday morning and then selling. But it is usually a bad idea to wait until the afternoon of expiration day to trade, because the market makers get very greedy near the close of trading.

Actually, if the market looked as bad as it did last week, I would have recommended “rolling out” the puts by selling this contract and buying puts with a December expiration. That kind of trade is best done early in expiration week, as well, but in this case, I think we should just sell them and watch what the market does for the next few days.

Dave wrote: “I just wanted to thank you for the timely heads up for the hedge on the portfolio. I immediately sold many of my stocks and bought the puts you recommended and have more than profited by the advice. It looks like this will work out about how you predicted. I would appreciate a Flash Alert when you see an end and we can get back to investing again. Thanks for your timely advice.”

Well, Dave, here it is. I trust you were careful about matching gains and losses for tax purposes, but now if you buy back things you sold at a loss, you could run afoul of the wash sale rules. So certainly sell the puts, and then either wait for the break over 1490 to buy back stocks (which may take a couple of more weeks, getting you past the 30-day wash sale date) or buy similar stocks but not the same positions.

John said: “Thank you for your most recent recommendation on the S&P puts, we’ve seen a very nice gain today with the S&P close below the support level of 1490. My question is: When do we jump off this option trade and what are the best stock investments to roll these gains into for a FAST turnaround trade?”

John, you may be one of the sophisticated daytraders that I mentioned above that could try to squeeze a little more out of this trade before you close it. Having said that, if the S&P breaks over 1455 for real, I think the fastest upturns will come in the Biotech, Content on Demand and WiMAX MegaShifts. I’ll be fine tuning the Top Buys in Thursday’s Radar Report, but I don’t expect many dramatic changes. It is certainly true that with oil already near $100 a barrel, the New Energy Technology MegaShift stocks should have a little less oomph going forward than, say, last August. So be sure to check out my updated list on Thursday.

Murray wrote: “I appreciate the warning you gave in your Flash Alert. In my situation, I am basically all in IRA accounts and cannot buy these protective puts. Do you have a suggestion for folks like me?”

It’s hard to get the leverage of options or futures elsewhere, but the various Rydex mutual funds that are designed to go up when an index goes down might help. There is the Rydex Inverse 2X S&P Fund (RSW) that is designed to move up when the S&P goes down, and it actually doubles the rate that the S&P declines. Also, think about starting one separate non-IRA account that you could use to buy puts when necessary.

Neville had a similar question: “Your Flash Alert on Tuesday was most timely advice for those who could act. But, some subscribers’ stockbroker accounts may not be authorized to trade derivatives. Please issue a follow-up Flash Alert and tell us whether to either (1) sell all our non-Top Buy holdings, or (2) sell half our holdings and buy Euros, or (3) sell the lot and fill our saddlebags with krugerrands and head for the hills?”

Good one, Neville. If any subscribers have an account that can legally buy options, please fill out the form to get qualified to buy puts and calls. We won’t have to do this very often, but when we do, it will be important for all of you to have an account qualified to make the trade. The answer to all three of your questions is “none of the above.” Buying puts was a short-term strategy to protect against a short-term risk. I still think that all of my recommendations will hit their target prices before we close them out. I also think that they will outperform euros, in part because a weak dollar pushes up the prices of all dollar-denominated assets, including stocks.

Now, krugerrands, hmmm….it looks to me like gold is going to $2,000 an ounce for sure, and $10,000 an ounce maybe. Of course, this is just the inverse of the weak dollar, so the only way to get to $10,000 an ounce is a dollar collapse that puts the S&P 500 up to 4500 or so. In that environment, it’s hard to tell how high the MegaShift stocks can go, so I’m sticking with them. (By the way, I prefer the Swiss or French 20 franc coins to the kruggerrand, as they are considered semi-numismatic and therefore less likely to be taken in the next round of gold confiscation by the government.)

Pete wrote: “Thank you, the protective puts are letting me sleep at night! What is the next level of protection?”

The next level of protection is to sell stocks and raise cash. But we don’t want to take that step just yet. It still looks to me like that is a March/April 2008 decision for an interim top, and a 2009/2010 decision for a final top. In other words, far enough away to let us book lots of profits along the way.

Larry commented: “Great insight to the banks and financials in your November 8 Radar Report. My question pertains to the overall U.S. markets if/when these financial centers do collapse. If you are correct, I would think we would not want to own any equities.”

The Fed bumped up the M-3 money supply growth rate to nearly 16% recently, but that isn’t a patch on what they will do to avoid a financial center collapse. They would rather see the dollar collapse. Your main protection against a collapsing dollar is to hold liquid assets: Gold, silver, stocks, commodity funds and the like. Real estate will also soar, so some REITs make sense. Equities do great when a currency collapses, because they are a store of real value.

Julien asked: “Following your remark that “Treasury Secretary Paulson has admitted that there is a working group on market functioning,” do you have a link with any web source for it?”

Sure, he has been very open about talking about it and seems proud he revitalized it (or at least wants his Wall Street buddies to know that they are on the job). You can just search for “Paulson” plus “Working Group on Financial Markets” and get a lot of hits. Look at http://www.treasury.gov/press/releases/hp174.htm and http://www.gata.org/node/4458 for starters.