Bears Win One For The Gipper

dow trading todayIf this is what I can expect to happen on all days that I am not in the market for a wedding, maybe I should take a few weeks off. It was another roller coaster for stocks today as we saw the red to green transition a few times, followed by a very aggressive sell off to end the day, closing the Dow 83 points lower. The significance of this move at close is very important, as the market is in its current drifting state, in which I believe there is no more question whether we have seen the best of the recent rally, minus a few exceptions in which I will discuss later on in the post. We may continue to have the up and down days, but I do feel that for the most part, this rally has overheated.

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At the beginning of the day it was looking to be much like yesterday. We started off down due to losses reported by Morgan Stanley and more concerns in the financial sector. However, as the day-traders woke up (they sleep in a bit), we saw the market slowly tick up until once again it was trading in the green. This shift actually worked to my advantage, as I was able to sell my FAS that I had purchased yesterday for a profit. This worked well as it ended up tanking by close. In addition to that, I got some good strong gains from my SRS options that I had picked up the past two days. I've still got a bit of catching up to do with those, but am very close to being back even, especially after the help from those quick profits from FAS today.

This is beginning to be a very dangerous market to go long in at this point. Not only is the fundamental economic data in strong support of a weakening economy, but now, as we saw by today's close, there grows an increasing concern from investors about the stability of the economy and the financial sector. This combination can be an equation for disaster if conditions continue to worsen. I am sure the end of day scare was due to the increasing concerns of the upcoming bank stress tests that are being reported this Friday. However, there are some things to consider when looking ahead for the results.

I personally feel that the big banks will perform rather well against these so called "stress tests." This is because of the ridiculous measures they are using to simulate the actual stress. Government has manipulated these tests so strongly, that I don't how these banks could fail. The unemployment rate they use as the "benchmark" for the stress test has already been currently reached. How is this a future indicator if we are already there? Also, GDP levels they are using for measuring are much greater than I see them being in the near future. So, I don't see how these banks don't pass and how people even value these tests.

Unfortunately, many of the investors out there currently do not know the truth behind these tests. They will see the headlines on CNBC showing that indeed, if this is the case, the banks passed the tests with flying colors and should be considered solvent and able to maintain stability in tough economic conditions. As a result, I would not be surprised to see a bit of a jolt in financials on Friday if we indeed see these results reported the way I believe they will be reported. With this in mind, I will be backing off on picking up anymore short position for the time being, especially on the financial side, until I can see how we react to Friday's test results. I will also expound much more on some significant facts about the bank tests and other problems coming shortly in the podcast tomorrow.

If we do see a small rally spark as a result from these tests, this will only make our vulnerability to a strong downfall stronger. These tests are based on almost zero economic fundamentals and actual data that we can expect to see in the coming future. The government has been very careful in the execution of these tests as they want the results to be strong just as much as the banks do. However, with deflationary signals gaining more and more strength, and with an ever more increasing number in employment, the outlook for the economy in the near term is dismal.

Due to the increasing volatility of the daily trading I may begin doing more of my "double trades" that I did during our last plateau trading period. This is where I purchase both FAS and FAZ by the close of the day. Then, on days like today, I cash in the profits for the first fund on the down slope of the first peak of intra-day trading. Then, the hope is to catch the market when it reverses at some point throughout the day, so that I may cash out profits for my remaining fund, thus creating profits for both funds by the end of the day. As we can expect more red to green days like we've seen the past two days, I may try this strategy and see how it works, especially going into Friday. Sure, this strategy brings its own risks, but the result if exectued correctly, as I saw today, is much like doubling down in Black Jack.

Hopefully, we see the rapid selling at close go into tomorrow. However, we've had a couple of good earnings reports from Apple, Yums, and Credit Suisse. As a result, futures are up, as of now. However, we've also got initial claims and existing homes report coming out tomorrow, which is bound to cause a reaction from investors. Tomorrow may be a day to consider a double trade for me in my account. We'll see. Have a good night and Happy Trading.

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  1. Anonymous Says:

    BTW stress test results are not coming out on this Friday. The results will be out only on May 4th only. They are going to release the strategy/rules used for stress tests tomorrow.

  2. Finance Fanatic Says:

    Banks will be briefed on their results on Friday. Even though they are planning on "publicly" announce the results later, I believe we will see some results slip through to the news on Friday. We've seen these "strategic" surprises before.

  3. Anonymous Says:

    Want your opinions on the short. Specifically SRS, that has never seen the downward pressure to this degree before even in the midst of REIT rally's. Is there some greater force behind pushing these ETF's to the floor possibly ?
    I have averaged into SRS to hang on here through impending doom to overshadow the obama hope rally, but in at 32. Do you think this is wise to hang onto while being at 26 as of today ? Should I continue to average in lower ? Thanks as usual for your insight.

  4. Finance Fanatic Says:

    Good question anon, and I will give my opinion more thoroughly on this evenings write up