Over the last couple of days, the market’s reaction to the bad news surrounding the housing and financial sector is, I believe, quite insightful about the psychology of the market and the reason for the substantial daily swings. The main concern seems to be the fear of another mortgage underwriter or investment bank going under. I can’t help but realize how the market psychology about this so-called “bad news” is extremely similar to late 2006/early 2007, at the height of the M&A boom; only this time, market dynamics are reversed.
You might be surprised how one can say that a market which refused go down despite the burst of the housing bubble, and a market which refuses to pick itself up despite a host of economic incentives, might be similar. Well, the similarity lies in the fact that traders seem to trade sectors, not individual stocks.
Do you remember how, back in early 2007, each Monday there would be a host of multi-billion private equity buy-out deals announced, and how the target of that deal's whole sector would be buoyed exuberantly as a result of that buy-out. Well, the situation in the financial and housing sector recently seems to be similar in that traders again are playing the sectors rather than individual stocks.
For example, over the past couple of days news about another major investment bank going under surfaced, and rather than the most likely candidates being beaten down, the whole financial sector got slaughtered. Among the names being irrationally sold-out were names like JPMorgan (NYSE:JPM), which in my opinion carries almost a zero possibility of going under.
I have stated JPMorgan especially because I’d like to comment on that specific company’s situation. If there’s a fear of a major financial going under, I’d think that JPMorgan would be the envy of investors, especially those who don’t want to abandon the financials altogether.
One should ask what, given the government-backing the institution received in rescuing Bear Stearns, are the chances that the same government would allow it to collapse? There are also a host of other reasons, like its size and its relatively better performance, why JPMorgan is a safe haven. If all this is not enough, JPMorgan would probably be the sole benefiter of a major financial investment bank going under, since it would give the firm the opportunity to acquire one of its major competitors at a rock bottom price.
I usually don’t recommend going against the trend (and although I believe the financials are due for another jump, I won’t recommend going long housing or financials, either). However, given the scenario I have explained above, I think JPMorgan as an individual stock is a safe and promising bet to get long. I think the stock is poised to go above 40 in a very short time, and if it doesn’t get stopped by technical traders at 40, it might even see the 44-45 range in a month.
Disclosure: Author holds a long position in JPM