Today marks the 17th Friday of 2008, which gives us 16 trading sessions as well as the Thursday before Good Friday. Not surprisingly given that the market is down year-to-date and investors have tended to fear the Monday Morning Massacre potential, Fridays have been tough. Of the 17 weeks, the last day of the week, as measured by the S&P 500, has been down 11 times. The average return on the last day of the week so far this year has been a little worse than -0.5%. With the S&P 500 down 5.31% through last week (an average of -0.31% per week), it is quite clear that Fridays have been tough, last Friday’s huge return notwithstanding.
Ok, fascinating trivia aside, need we view today as a risk or an opportunity? As I write this (Thursday night), the after-hours trading has been a carbon copy of the previous night’s decline after a healthy rally. The culprit tonight was primarily Microsoft, after last night’s Apple-inspired retreat. I am not too concerned. The pendulum is swinging the other way, and the melt-up that I have been predicting is well underway, especially in Financials. Perhaps little noticed, American Express (AXP), after a dismal Q4, traded up sharply on better-than-expected numbers. It happens to be the 10th largest S&P Financial company. Don’t look now, but that looks like an inverse head and shoulders formation!
I have previously discussed the likelihood of an upside violation of the trading range that has been in place most of the year, and I am sticking to it. While I am tempted to imagine that the bear market is over, I don’t think that it is, at least not in duration. I have changed my views only by raising the probability that a new low will not be made later this year to 25% or so. Instead, I expect that we will trade down again over the summer and into the election, but possibly hold the previous post-Bear Stearns debacle lows. That level was pretty attractive in March and will be even more so six months or so later. In what I believe was my most popular Seeking Alpha article to date, I discussed the potential to extend out of the trading range to 1415 or so on the S&P 500 (in March, when it closed at 1334), a retracement of about ½ of the move from the 2007 peak to the 2008 low . I now believe that we could go as high as 1455, a level that would represent a retracement of the move from the 2007 peak to the 2008 low of approximately 62%. Trust me, though, I won’t wait for those last few points! This level would still represent a decline from year-end of about 1.5%. If we were to break that level, I would most likely throw in the bear towel, which I haven’t been waving since February, the last time I published a negative article on the market. In fact, of the 15 subsequent articles, the only negative one was to express caution on Under Armour (UA).
Why the short-term rally? Because the market hurts the most people that it can. I believe that there are a ton of shorts and lots of underinvested longs. This potential break of the upper end of the trading range will be the mirror opposite of what happened after the Societe Generale debacle and then the Bear, Stearns implosion. What will the “white swan” event be? I have no clue. Could it be a great payroll report in early May? Could it be a plunge in energy prices? No matter the catalyst, the market is likely to surprise to the upside. The greatest opportunity in my opinion is in the Financials. I have shared my views in general as well as on a few specific names: Fannie Mae (FNM), EZCORP (EZPW), Cullen/Frost (CFR) and the REIT BioMed Realty (BMR). If you check my website, you will see that I am also long Americredit (ACF). The ETF SPDR Financial Sector (XLF), which is up only very slightly on the week, is likely to rally to at least 29 and possibly as high as 32 in the rally that I am anticipating. Wouldn’t that be a shocker? First, we have to get through 27, which has served as resistance for the last couple of months. I think that the Financials have probably bottomed, but it will take some time before investors really jump in. The first step is to flush out the Armageddon trade. After a base is built, then I will become more constructive. The book values are coming down, and that has captured the attention of investors. I maintain that the JP Morgans (JPM) and the Bank of Americas (BAC), which have the market cap, will ultimately be stronger and have fantastic earnings power. Why investors continue to worry about has-beens that no longer have much market cap befuddles me. As I look at these larger institutions, they sure look cheap though not especially timely. Reduced competition seems like it will prove to be a good thing. The sentiment will ultimately become friendlier. I guess I fear most that I will overestimate how long they stay in the penalty box. Until then, though, I urge you not to overstay this rally.
Disclosure: Long UYG (double-long XLF), FNM, EZPW, CFR, BMR and ACF