Rethinking Merrill Lynch and Thain After Thursday's Announcement

On Wednesday, I was positive on John Thain as the new CEO at Merrill Lynch (MER) ($56.11). I was also a buyer - so I bought a little. But now I'm holding off a bit.

I still think the fact that John Thain got to look at the firm's books and still wanted the job means that there is probably no huge surprise write down coming. Remember this guy grew up at Goldman as a mortgage trader and knows all the trader tricks for hiding losses in a mortgage/CDO trading book.

However the market is still pricing in more negative surprises so that means MER cheap here. I've decided it will likely get cheaper so I'll be greedy. After putting my toe in the water and buying the first part of building a position on his announcement I've decided to hold off on adding more.

Why hold off?

I don't believe this market rally and I think my next buy in Merrill will be lower. Trading in the whole U.S. market and financials, in particular looked too much like short covering on Wednesday and it still does. I only seem to make money with a few technical indicators but one that is pretty reliable is the bear flag . It usually indicates that a down trend will continue. That's what the popular financials exchange traded fund (XLF) ($30.51) looks like. Why does the bear flag work? It's pretty simple, it just indicates a short covering rally in a longer term down market.

For a fun and feisty FAQ on Thain check out Felix Salmon's blog at Portfolio.com

Disclosures: I own MER (bought it at $58.10 ouch). Right now I'm hoping the price falls more so I can buy more. But I'm not sure when that will be. What did I sell Friday to make room for MER. I sold (AIG) ( $56.11) and bought some out of the money calls just in case it goes back up. But I haven't heard enough bad news from AIG, that makes me nervous. I do not own XLF but am short Jan 2009 $25 strike puts (VKPMY) ($2.28). This means I might be forced to buy XLF at $25 if the bottom really falls out of the US financial sector in the next year. (see my don't try this at home warning next).