Why I Bought Financials (Despite the Mess)

If you’re going to be a trader, and you don’t have to be and trading is not the core of what I do, at some point you have to pull the trigger.  We always want that perfect, can’t lose, super obvious, entry (and exit) point.  But it’s not always that easy.  At some point, when the risk/reward equation feels right, you have to pull the trigger and put on a position.  Otherwise, you’ll never act and you’ll never trade.

I went ahead and bought the financials via the ProShares Ultra Financials (UYG) yesterday afternoon for a variety of reasons:

• By my count, Monday represented Day 26 of the selling stampede that began on Friday June 6.  These things “tend” to last 17-25 days, according to Raymond James’s Jeff Saut.  At some point, stocks take a break from going straight up or straight down.  I think we’re close to that point.
• At 1225, the S&P is 15% off its recent high (1440 on May 19th), has pierced previous lows (1255 on March 17th), and should have some support around 1220 which represented the low during the Summer ‘06 selloff (also see the last chart in this post by Tim Knight from yesterday morning).
• The troubles at Fannie (FNM) and Freddie (FRE) have been the catalyst for the latest leg down and Sunday’s intervention by the Feds seem to provide a short term resolution to this issue, thus taking Fannie and Freddie away as potential further downward catalysts in the short term.
• The financials themselves, as measured by the Select Sector SPDRFinancial (XLF), are down 36% from their recent highs (May 2nd), are 35% below their 200 day moving average, and volume is at levels we saw during the climactic Bear Stearns (BSC) selloff (XLF YTD Chart).  The selling during the latest down leg has focused on the financials and any bounce should therefore be led by, and strongest in, them.
• Can the news get any worse?  IndyMac, the nation’s 9th largest mortgage originator in 2007, failed on Friday and was taken over by the government.  The Treasury and Federal Reserve intervened yesterday to prop up Fannie and Freddie.  As long as “the system holds together” can things get too much worse short term?

Maybe we get another capitulation day in short order, a huge selloff and a spike in the VIX into the 30s.  If so, then I’m early.  It’s certainly very well possible that this does happens.  Trading is art, not science.  Nobody knows exactly what will happen, but  I’m willing to put some money to work here.

Disclosure: Top Gun is long the ProShares Ultra Financials (UYG).

Comments

[bbzz24:]

you look well fed. i can assume you dont earn your living by day trading. so i will excuse your latest stupidity.

2008 Jul 15 07:20 AM

[pelican:]

Don't know why the previous poster felt inclined to slam you but you may be right. Nothing is linear in life.

2008 Jul 15 07:41 AM

[David Tsao:]

The selling surge will continue. I admit it is hard to buy stocks in this environment, but some stocks are on sale now. I got into XLF a few months ago. Was it the bottom? Well of course not... that's easy to say now. They key is I took a small bite. If it continues to go on sale, and you believe the world isn't coming to an end, then now is a better time to feast on those quality companies you've always wanted to own.

2008 Jul 15 08:00 AM

[Bonanza36:]

If you are throwing your money away, just send it to me...I will make sure it gets a good home.

Even if you are right, what makes you think it will be a V recovery and not an L recovery?

Long SKF, FXP

2008 Jul 15 08:10 AM

[Medici:]

Your article title should be "How I lost it All in Financials"(Despite being advised not to), why try to pick bottoms....buy strength on dips not weakness-

2008 Jul 15 08:23 AM

[Pauly B:]

When banks say they are fine and well capitalized like Bear Stearns and Fredi and Fannie, and then you have emergency meetings at the FED and White-house on the weekends and the Treasury Secretary saying they need an emergency bailout at a press conference on Monday how can anyone believe any of their balance sheets?

Until we know what is on their balance sheets, no investment for me.

2008 Jul 15 08:32 AM

[glassbox:]

Greg, the likes of bbz24 and bonanza60 are the very sort of people who live to deliberately make life miserable - they have huge motivation to push their negativity on others. Their day of reckoning will come.

2008 Jul 15 08:59 AM

[LiquidSoapD...:]

"Buy strength on dips not weakness-"?
Wow, so if I do this, will I get rich? How do I do that?

Even if financials still have a way to fall (as my gut tells me they do), anything close to dollar-cost-averaging into this very discounted market makes long term INVESTING sense (perhaps the bashers are all short-term traders, or think they can call the bottom). I'm amazed how many of you think you are so much smarter than Benjamin Graham. I also wonder how many of you would have been smart enough to say not to buy financials a year ago, when they were triple the price?

2008 Jul 15 09:50 AM

[Boubou:]

If you don't take a flying leap, you'll never trade..........? So?
This sounds like recklesness.
Prudence, prudence prudence...
What happened to prudence virtue and modesty.

( From a punter too old to be president)

2008 Jul 15 10:19 AM

[secmaven:]

The only thing that will turn the financials around is if the shorts start to cover. And the only thing that will make the shorts cover is if this earnings season brings positive surprises. What is the chance of that?

2008 Jul 15 10:29 AM

[glassbox:]

Another way to turn the financials around is tell the current shareholders to stop lending their scrips. No need for positive earnings surprises. its much easier this way.

2008 Jul 15 10:32 AM

[bet5cornell:]

Are you retarded...thats your rationale? I hope you arent playing with your retirement money.

2008 Jul 15 10:32 AM

[EE:]

Your only hope is to buy puts and take delivery of silver bullion bars, & coin. Read butlerresearch.com & silverstockreport.com The dollar will tank, many banks will bust, and unless cheap energy is quickly available the golden years of the USA are over. Get silver so watching the slide won't be as painful. Taps is playing louder & louder but most are deaf.

2008 Jul 15 11:09 AM

[glassbox:]

bet5cornell, what is so retarded about my rationale? I invite you to be specific instead of throwing names at my ideas.


On Jul 15 10:32 AM glassbox wrote:

> Another way to turn the financials around is tell the current shareholders
> to stop lending their scrips. No need for positive earnings surprises.
> its much easier this way.

2008 Jul 15 11:16 AM

[oldman:]

Good for you, you're doing what I would also like to do. Heck, maybe I will with a few bucks.

2008 Jul 15 11:47 AM

[ETF Wanderer:]

fortunately, for us, we will be able to appreciate and see how your story ended. I will be bookmarking this page.

everybody knows that financials will go up someday, but not before some serious damage. question is now or after a month or after a year. you have picked the "now" trade.

2008 Jul 15 11:56 AM

[Samuel Cash...:]

Is it possible that the current price of financials is an accurate measure of intrinsic value and that we are currently anchored on the prices they exhibited months ago when they were hovering at their highs?

Also, just because a stock has gone up or down 13 or 15 or 27 days in a row doesn't necessarily have anything to do with it's performance tomorrow (they may very well be independent events, see: gambler's fallacy).

2008 Jul 15 12:43 PM

[valueinvest...:]

I have DSL in my pool as the next one to go under. Hope WM, NCC, and others don't get there first. Personally, I think you would be better off making a contrarian bet in something like refiners as oil is much more likely to go down than financials are likely to recover their earnings power.

2008 Jul 15 01:12 PM

[notsosmart:]

theres nothing wrong if somebody wants to lose money. i have been saying for years this is just a game. no longer business.its just a bit slower than vegas or the casinos.except for good dividend paying co.s i got out @14,000dj. of course i had to pay 22% tax but the scammers will will have their hands in your pocket.

2008 Jul 15 02:43 PM

[Jason Rines...:]

Won't do it:

1) Housing has 10% more pricing decline by anybodies assumptions
2) One year of inventory now piled up (setting new records)
3) Election season. October historically looks better in election season to buy lows
4) Have better chance buying several foreclosed homes, use a property manager and rent them out and hold them long in my opinion then investing in the financials recovering anytime soon. Lost confidence by the entire global financial system will not be restored overnight, even when the surviving banks have shored up balance sheets.
4)

2008 Jul 15 02:49 PM

[Diyg:]

At this point, no one knows - or can know - what financials are worth. So why buy them until their real estate loans are resolved?

2008 Jul 15 03:33 PM

[Newby:]

It ain't over till the fat lady sings. Does any body knows the song

2008 Jul 15 05:19 PM

[oldman:]

Newby, yea. "I Can't Stand it Anymore"

2008 Jul 15 05:37 PM

[Ames Tiedeman:]

I think it is too soon. But the best way to profit on the coming upswing is with an ETF in this sector. UYG is a name to watch.

2008 Jul 16 07:39 AM

[LiquidSoapD...:]

An interesting point on financials is that, after this crisis is over, they won't be able to make money as they have been the past 10 years -- no more crazy derivative products or easy originating of mortgages.

2008 Jul 16 09:18 AM

[buyitcheap:]

This is an oversold bounce - and in this case a rising tide is going to lift even the financials. We're still in a bear trend but we've gone so low, that a push up like yesterday will cause shorts to cover and that will drive it further up. I am also long UYG (@$14.89) but for something as rocket fueled as this, you need to have an exit strategy in your trading plan. I'm taking the profit off of the position for every 20% move up until the capital is recovered, with a stop at $14.02. I wouldn't be surprised if on this temporary rally UYG sees 24-28 over the next 30 days (black swans notwithstanding.)

2008 Jul 17 07:11 AM

[LiquidSoapD...:]

Huh? The rising tide lifted the financial???

Yesterday's "oversold bounce" (as you call it) was driven by financials! In fact, every market summary I've read about yesterday's broad market gains credits the banking sector for lifting the market, not the other way around. So it's hard for me to pay attention to the rest of your post (correct or not) when the first sentence is the exact opposite of what actually happened.


On Jul 17 07:11 AM buyitcheap wrote:

> This is an oversold bounce - and in this case a rising tide is going
> to lift even the financials.

2008 Jul 17 11:06 AM

[User 105378:]

Great call Greg! Do you have insight to when is the short-term peak for UYG (or short-term bottom for SKF) ?

2008 Jul 19 09:25 PM

[buyitcheap:]

Liquid, appreciate the input, last I had looked prior to the post, it looked like it was airlines that led by the largest percentage over the last week, not financials, hence the post. Funny that I get the same uncomfortable twinge from considering putting money in airlines as banks lately.

I liked the front page of your website btw, and would invite you also to share any interesting strategies or approaches that are working for you.

2008 Jul 21 02:21 PM

[ETF Wanderer:]

Hmmm... Mr. Feirman, UYG on July 14th for 15.65 (say at the Close) and 15.95 on Oct 3rd, 14.62 on Oct 4th today --- so you are pretty much at the same levels. I would have thought that you have been blown away by now!

Financials can be indeed a very tricky sector.

2008 Oct 06 10:13 AM