For the short-term, I do not like what I am seeing in the market’s action. And that’s why I’m sending you this Flash Alert today. It is possible that the S&P 500 is about to go all the way down to test the weekly breakout level at 1326, about a 175-point drop from current levels. It could happen over just a few trading days, in which case the media would call it a Crash. Certainly, a 10% to 12% drop in a couple of days would get everyone’s attention.

If this happens, I expect the test to be successful, the S&P to bounce back and the bull market to resume, so I do not want to move any of our stocks to a “sell” rating. You see, the Fed would cut rates deeply if this downturn actually happened, and our portfolios would soar right back to current levels and much higher.

However, since many of our holdings are development-stage companies that typically get hit the hardest in declines like this, you may want to protect your portfolio with some insurance puts for the next few days. I know that the current pattern in the market has been doggedly bullish, with every attempt to close under 1500 rejected. But that level has survived four tests in the last few days, and it gets harder and harder to survive these tests if the market can’t find the energy to rally up and away from 1500. This situation is very similar to April 2000, when the S&P 500 was also trying to hold at 1490 to 1500. In about 10 trading days at the end of March and beginning of April, the S&P touched or went under 1490 a total of eight times, but each move down was stopped. That included one crazy day when the S&P plunged to 1416 intraday, only to rally back to close above 1490.

But on the ninth test down, 1490 gave way, and over the next three days the market got as low as 1466, then 1430, and then 1339, where the decline ended.

And that’s why I’m recommending that you protect your portfolios with insurance puts. I know that puts are expensive if you hold them for a long time, but I really think that the dangerous period here will only last one to two weeks. If the S&P can break away from the 1500 level, we’ll sell them for a small loss. But if there is a Crash, we will have some protection.

So, I recommend that you buy puts on the S&P Depository Receipts, more commonly known as SPDRs or Spyders. The symbol is SPY. You can go cheap on this one by buying the November contract, which expires at the close on November 16. We should have a resolution to this situation by then. The equivalent of 1500 on the Index is the 150 contract on the SPDRs, and the symbol for the 150 puts is SYHWT. They are currently at about $2.15, or $215 per contract. Each contract should protect about $15,000 of portfolio value, so it will cost you 1.43% of your annual return to buy this protection for eight trading days. Not cheap, I know.

If you want to have some protection, but the SYHWT is too expensive, you could buy the 143 contract, SFBWM, for only 35 cents, or $35 per contract. At 1326 on the S&P 500, they would be worth about $1,000 each.

Let’s hope the puts aren’t necessary and expire worthless. But it’s better safe than sorry at this point, because a market crash on top of the credit crisis, weak dollar and overleveraged consumer would not be good for the economic outlook, no matter what the Fed does.