Calling Today A Short-Term Bottom for Financials

One thing that’s essential is enormous volume.  With gigantic volume you can read the markets true opinion - we will need outsize volumes to be able to say ‘Okay, the bottoming or topping has occurred’.  It won’t be the end until investors have just given up and don’t even want to talk about these names.
- Douglas Peta, Vice President, Market Strategy, J&W Seligman

Barring another bank failure or some other unforeseeable catastrophe, I believe today marks a short-term bottom for the financials.

That’s because I think we saw the kind of fear and capitulation that exhausts selling and tilts the balance of supply and demand towards the buyers.

The convincing case to me is the terrible price action combined with enormous volume.

Let’s start with the most well known and used vehicle for trading the financials: the XLF.  Today, 469 million shares of the XLF traded hands - 50% more than the previous all time of 311.7 million shares last Friday (July 11).  Even during the Bear Stearns debacle, the XLF never traded more than 300 million shares a day (XLF YTD Chart).  That’s capitulation, baby.

Next, let’s look at the ProShares Ultra Short Financials (SKF) ETF.  This is a popular way to bet against the financials.  The chart has gone parabolic on climactic volume (SKF YTD Chart).  The 36.7 million shares of this ETF that traded hands today is also an all time record.

Finally, let’s look at the ProShares Ultra Financials (UYG) ETF.  This is a popular way to go long the financials.  Prior to June 24, 2008, the fund had never traded more than 50 million shares in a day.  From June 24 to July 10, it traded more than 50 million shares 3 times.  It’s traded more than 50 million shares each of the last 4 trading days, including a record breaking 105.3 million shares today (UYG YTD Chart).

This kind of immensely negative price action coupled with enormous volumes is characteristic of turning points, as pointed out by Douglas Peta. 

That’s because it represents an enormous amount of sellers exiting at the absolute bottom, after hoping for a bounce all the way down, unable to take any more pain.  And it represents an enormous amount of buyers entering the market at what they feel are bargain basement prices.  At these points, the balance often shifts between supply and demand leading to a reversal in price.  To put it another way: Most of the sellers are gone now and there are a lot of potential buyers.  That’s a recipe for higher prices.

Disclosure: Long the ProShares Ultra Financials (UYG) ETF.

 

Comments

[70chip]

All these "banks" are leveraged 20:1. Where do you expect them to find the capital to unwind from these increasingly illiquid leveraged positions that are collateralized with rapidly depreciating assets (houses)? We only kissed 30 on the VIX today for a second.. Volume was huge, but the volume has increased because the share price is in HALF! (ie $1 million today trades double the shares that it did 6 months ago ) we're not bottoming until the VIX is in the mid 30s. There are large institutions that are rapidly approaching insolvency. Immenent Failure, Margin Call, whatever you wanna call it..

[stonebraker]

Just to clarify the author's point - his title did say short term bottom. Long term - your points are valid.

[blah-blah]

Can't wait for all the short doomsday bears like the commenter above just all over this. This site is just rife with them now and their nonsense is such a treat to read too.

[yuman]

I'd want to see a W formation as a confirmation of a bottom.

[Alain Wong]

Short term bottom as in one or two days? Yes. But longer term, more and more banks will fail and I believe that most financial stocks will continue to go towards 0. This is not the time to buy any stocks, folks.

[Matt fromQueens]

What's the big rush to buy now? How about waiting to see if an increase in price is being accompanied by rising volume?

[najdorf]

A short-term bottom is about the most useless market call, even if it's true, which it might not be. What do I do with a short-term bottom? Buy and try to sell on a rally before more bad news send us down further? Short and hope that I don't get squeezed? Trade wildly in and out of positions with every market swing? Sure, subjectively speaking it seems like high volume selling might transition into more buying interest at these new lows. It also might lead to further panic, particularly if some 2Q earnings look bad. Tell me about the valuation, solvency, or future earnings or at least give me a clear and actionable technical reading with a trade recommendation. The only good thing about your article is that you can't really be wrong. If stocks go up, you can say you called the bottom. If stocks go down, you can say you meant really short-term and the NEXT time you call the bottom it will be right (professional analysts have been playing this game for most of a year - you're behind).

[petecoves]

There is not one person on this blog that has backed up thier opinions with any facts. (it sounds like jiberish)
The author is absolutely correct period.
And another poin, is that I'm sure this will not help the Financial bears -sell on the opening so you don't lose your shirt!

Just now, securities regulators issued an emergency rule on Tuesday to limit certain types of short selling in major financial firms, including Fannie Mae and Freddie Mac.

The rule is the latest effort by the U.S. Securities and Exchange Commission to clamp down on market manipulation that some blame for the sharp declines in financial stocks and the demise of investment bank Bear Stearns in March.
The rule will go into effect on Monday, July 21, and last through July 29, although it could be extended to last up to 30 days. The SEC said it will consider rules to address short selling issues across the entire stock market.
The emergency rule applies to 19 financial firms including Lehman Brothers, Goldman Sachs, Merrill Lynch, Morgan Stanley, JPMorgan Chase & Co and Citigroup Inc.

[squashnut]

No, Najdorf is clearly correct. Kiss my bottom.

[wdhalgren]

Interesting. When an index makes a new 52 week high on high volume, the bulls trip all over themselves to point out what a positive sign that is. Then when it makes a 52 week low on high volume, that's capitulation, and also a decidely positive sign. This technical analysis is powerful stuff.

[najdorf]

wdhalgren: It's only after you learn about the head-and-shoulders and the cup-and-saucer that you get more magical technical analysis wand and can determine when up means down and when down means up. Remember: Citigroup can lose an unlimited amount of money and it doesn't matter. Vikram Pandit could send CDOs to Mars in an off-balance-sheet vehicle, and it wouldn't affect the share price one bit. What matters is how many speculators buy and sell shares on a given day and what pretty shapes you can make on the graph. Forget the fact that we have no idea who the buyers and sellers are and what motivates them. Forget the fact that these stocks turn over frequently and today's buyer is tomorrow's seller is next week's buyer. Wish thinking will carry us to maximum profits!

[User 210417]

wdhalgren: Author is correct. A cursory review of S&P 500 chart reveals that panic selling on very high record volume is the low. The problem is hindsight doesn't really help a lot because how low can you go and high can the volume get. And can't the volume just dry up and the price move sideways (which hasn't happened before)? Investing is a bet which implies the weighing of probabilities in the face of very imperfect information. So many people take the easy way out and take a market psychology strategy which has worked 99% of the time. Can you blame a person for doing this? On the other hand, the message board post strategy where one invests based on what the majority of people are saying on message boards fails most of the time (though I have no evidence to back that up).

[texalope]

Great Call- Whether tech analysis is valid or not. Additionally, Spikes in the VIX and Capitulation selling sound too formulaic to me to be a strategy, but it worked this time- Once again- GREAT CALL

[Jerlad]

Volume reversals cannot be gleaned from ETFs or ETNs. That's because they show activity in the FUND, not the underlying equities. Price is ok (especially for the larger ETFs because of there high liquidity) but volume? Sorry guys - no way.

A company's stock (or an index, if volume is available) is far better for volume reversal analysis.

I trade ETFs but I only look at price. I haven't done as well as with actual companies because my timing has sucked so far.

[AmesTiedeman]

Great call. You timing was impeccable.

[Gus]

I agree with the technical on this article. In additiion, I have seen financial/credit/trust crisis like this in develping countries that with less resources managed to recover even faster than every body expected
Financial are not technologies, instead is the simply business.

[AmesTiedeman]

UYG is a dream to trade. We will see a pullback, but not to under 14 unless we see some devastating news in the financial sector.. This is an ETF that 2-3 years from now can double from these levels.

[Greg Feirman]

Yeeeeaaahhhhh Bbbboooooyyyyyy!!!!!

[AmesTiedeman]

Greg, you should have said a short, short, short term bottom. The lows are about to be re-tested.