At some point we are going to see a deal agreed to and ultimately voted and passed.

Now in the past I have always rejected the use of hedges on positions because of the high cost of "insurance" which eats into profits of high return trades and turns barely acceptable trades into losers.

Times have changed as overall market volatility has increased risk and the gut-wrenching market swings which we have seen of late show an accumulated move of 1000 DOW points several days last week as prices intra-day moved from despair to euphoria to despair and back again in a single session.

So we are close to a deal...Is that going to resolve the volatility issues? Not hardly. The credit markets are clogged up and if successful that will be elevated with pressure taken off of financial institutions allowing money to begin to flow to finance goods and services as well as mortgages again.

There are a couple of uh-ohs out there....Well actually more than a few, but we will look at a few of the most significant.

First of all a massive run on the banks was halted when the ability of the Hedge Funds to short financials was taken away from them as shorting of 799 financial institutions was prohibited until after October 2nd. That moratorium may be lifted or another 30 day extension may be added depending on what the FED sees as a result of the new prospective legislation.

The short selling ban has seen gains in the shares of many financial companies, but has left the $2 trillion hedge finds in disarray. Managers have been left with few alternatives to their primary investment hedging tool.

Short selling involves borrowing stock and selling it in the hope of buying it back later at a lower price. It's an integral part of most hedge fund strategies because it helps managers generate returns even if markets are falling. With little fanfare another 50 or so companies have been added to the list with such unlikely names as Zale Corporation (retail jeweler) and CVS Caremark.

Financials have seen gains of 17% since the moratorium was put in place.

Those savvy in the Double Index Inverse Proshares and other vehicles automatically might assume that these positions could be backstopped by buying the SEF or SKF inverse funds. The SEF seeks to match declines in the financials with their own hedge strategies while the SKF attempts to produce a double reverse response to a broad ETF such as the BKX which directly correlates to gains in the financial sector. The way these double index proshares work is if the underlying index (BKX) goes down 1% they will, through hedging strategies attempt to make the SEF increase in value by 1% and make the SKF increase in value by 2% and in normal times they are pretty successful at it.

Problem solved right?....Not quite. Trading on the Amex Exchange where these issues trade was halted when the moratorium on financials was put in place, except for liquidations. Very quickly this prevented the use of these instruments to circumvent the restriction. It wouldn't have mattered anyway, because those two funds rely on HEDGING to produce their product, so they really don't have the ability to fulfill their goals anyway.

The real question, then, is what is going to happen when the moratorium is lifted. IF the financial institutions still have to mark their assets to market rather than to some future value we are going to go right back into the same downward spiral in the financials. Hedgers have to be convinced that the banks and other institutions will have assets unencumbered by this debt....Immediately. If that is what comes out of the sausage making on Capital Hill, the balancing will be moderate and orderly. IF NOT??? (that's why the details are so important).

I have come up with a strategy for protection in this or any market when volatility puts us in jeopardy, not only when prices are plunging, but when prices are rallying disproportionately. If the deal that passed seems to put a finger in the dike and stem the potential losses we are liable to see a 1000 point rally, but this could be just as dangerous. Hedge funds with their hands unbound will absolutely take profits at the first signs of loss of rally momentum increasing the risk of another big sell-off...not as low as our market bottom, but enough to scare the party goers sober. There are 8000 hedge funds today that control the markets (They trade up to 70% of the stock daily in the markets during periods of volatility). It is not the Moms & Pops or even the Mutual Funds that control prices any longer, and they can make money no matter which way the markets go. Mutual Funds can't short stocks or buy puts or use any of the tools such as Futures to limit their risk. They have to remain invested at all times, so they are stuck.

So how do we get some protection from both sides of the market excesses and not pay an exorbitant price for the cost of that insurance. There is a way and over the next day or two I am putting my current projects aside to develop it because I believe it is that important.

I will be adding this to my mentoring course and will be doing up an instructional video for them, but I will also present the outline of the plan here for everyone to implement and allow you to add that degree of protection that has only been available to the big boys prior to this with about the same level of cost that only they have had access to. They put up less than 10% for the ability to hedge their long or short position and if they don't use it they get it back....We CAN do the same thing.

Obviously ...MORE TO COME