Gerry Sullivan's  Instablog

I thought earlier today (Thursday 8/13) that we had made an intermediate term top around SPX 1015.   The SPX did made a new 2009 closing high today, but did not exceed the intraday high of 1018 made last Friday Aug 7. 

We are at SPX resistance 1015-1018.  One might certainly expect a pullback as we are up 52% from the 666 intraday low.  I find it interesting to note that at the Oct 1974 low the SPX was at 63 and rallied to 96 in July 1975.  That is also a 52% gain.  3 1/2 years later at the beginning of 1979, the SPX was again at 96.  It rose no higher than 108 during that 3+ years.

So, I am leaning to the downside, but ready to move if the market shows me that I am wrong.  I am 30% net long, so I am participating, but not as much as I could be.

Disclosure: long stocks, short SPX calls

I am not a typical Seeking Alpha perma bear.  My stated strategy is long bias, that is long and short but always net long.  My typical net position is 40-60% long. Currently, I am 26% net long, the lowest I have been in 5 years.

Of course, I wish I had been 100% net long from March 9, 2009 until today, but that is not consistant with my cautious but positive style.

The reason for my caution is both objective and subjective. Objective because many technical measures are at or approaching bullish extremes (see Bill Luby's comments on the SPX at 15% above its 200 day simple moving average for the first time since 1999, or David Fry's charts.)  Objective because the 2nd Qtr earnings reports mostly beat reduced estimates but were short on revenues.

Subjective because many commentators who were non-believers in the rally (especially the last 100 SPX points) are now talking about how quickly the SPX could move from 1000 to 1100 because there was so little trading 
between those two levels on the way down.

Now the SPX could indeed make a quick move to 1100.  If it does, I will profit from it, but I will also be mostly hedged against a decline.   At this point it is more important to me to protect capital from loss than it is to maximize gain.

Disclosure: long 80+ stocks, short SPX calls, 26% net long.

Citigroup (C) bottomed when the broad market made its lows in early March.  On March 9 Citi traded under $1.  Less than 2 weeks later it was $3.80, today Citi closed at $2.69.  After the initial run, Citi has been held in a check by the arbitrage that accompanied the huge exchange offer with the holders of preferred stock.  That exchange is now complete and this is what I have been waiting for to buy Citi.

The spread between the new Citi shares being issued (symbol C.wd) and the regular Citi shares has dropped to a range of 4-5 cents.  Likewise, the synthetic Citi that could be created by shorting puts and buying calls is a similar 4-5 cents cheaper than regular Citi.  The arbitrage should no longer put much downward pressure on Citi common. 

I am aware of all the issues.  The number or shares outstanding has mushroomed from under 6 billion to over 20 billion shares.  Citi may still lose money this year and a profit next year is far from certain.  There are articles about an energy trader who is apparently entitled to a $100 million bonus.

Make no mistake, this is a valuable franchise.  Citi will readjust to its new reality, and you can make money buying the stock.  Citi trades below tangible book value and a lot of the assets on the books may be worth more.  The Smith Barney sale to Morgan Stanley looks good and Citi should receive additional payments.

Last fall I was in Russia and I had a Citi debit card.  I saw a Citibank and went in with my debit card and got 5000 Rubles in cash (about $175).  I did not see any other branches of US banks.  Just anecdotal evidence, but an indicator of the value in the Citi franchise.

I was waiting for the arb pressure to abate, and I think it has.  I plan to buy Citi.

Disclosure: no position in C at this time.