Is The Rally Dead?

american express problemsWell, as I expected, we finally saw a strong day of selling from the bears as a reaction to a very dismal earnings report from Bank of America. The market opened down right from the start and didn't really look back, with the Dow closing down 289, once again under the 8000 mark. This is exactly the problem I foresaw with Wells Fargo jumping the gun on their announcement. By doing so, they being the strongest of the banks, set a high standard for the rest to follow. Sure, we did see a tremendous rally as a result of the surprise announcement, but the rest of the bank's numbers just do not look nearly as good.

Bank of America indeed reported profits, as we all knew that they would. However, investors are finally beginning to look deeper into the reported numbers to try and extract the true meaning of what is being reported. With the profits came a record amount of bad debt write-offs, as well as the setting aside of $6.4 billion as reserved for future losses, which goes to show their outlook continues to remain pessimistic. They recorded $13.4 billion in credit losses and only expect that number to get worse in coming months.

crash market stock podcastIn addition to that is the large amount of commercial real estate loans that they have coming due, which still haven't reached their day of reckoning yet. As a result, Bank of America's stock fell almost 25% as investors are clearly not feeling safe invested with them. Oh, and also please remember that Bank of America also received a nice lift from TARP funds of over $45 billion. You would think that would help right?

At any rate, I have constantly been discussing my concern with remaining bank problems. Even after Wells Fargo's numbers, it was far too early in our economic crisis to begin seeing such a strong rebound in our financial sector. As a result, we could see a strong punishment, considering that so many were and may still be convinced that the worse was over for banks. There still exists the very strong probability of certain banks becoming nationalized, as with increasing credit loss, many should not be able to survive.

However, with this "bad news" from banks, may come some opportunity for me. Although, I am still not fully convinced that this rally is completely over, I am definitely convinced it has slowed severely and will most likely be ending shortly, if not already. As a result, I did find it appropriate to make some trades this morning. To minimize my losses, I decided to stick with options, as bears still may be a bit vulnerable to a small rebound rally. I went in and bought up some short term FAS put options as well as SRS call options. I go into more detail of what strike and expiration date on today's premium podcast (subscribe here). Having traded options with a near expiration date, they should move with more volatility. This is my hope as I believe that the next two weeks will be a downward trading average. I hope to make enough profits off of these in the short term until I can get a strong confirmation of a big downturn from some of the models and charts.

Another opportunity I am seeing in the near future for trading is the shorting of credit card companies. As unemployment continues to rise and consumer income continues to decrease, credit cards will most likely rack up a pile of debt. Early on, the government gave a lot of bailout funds to credit card companies, which sent them soaring in the beginning of 2009. However, Obama's new plan is to restrict credit card's advertising policies and try and gain more control of how they do business. As such, I would expect much more people who have been approved in times past to start being rejected. American Express and MasterCard are two companies that I will be eyeballing very closely and see some great opportunities for shorting, especially if this sell off really kicks in.

So far, this pull back is almost perfectly mimicking the one we saw back in January. Another strong day of selling tomorrow would be enough for me to believe that indeed we are retracing to near 750 levels. At that point, I would have to re-evaluate and see where we go from there. We indeed may see more down trading tomorrow as IBM reported a very large fall in revenues for the quarter. Many were hoping for continual strong numbers from NASDAQ, but obviously this crisis covers a lot of ground.

I am very well aware of a possibility of a small rebound, which would not discourage me. After a strong day like today, profit taking would be expected. It is if the buying continues for multiple days. Technicals are looking to sell, and as we saw from this morning, all computers were set to sell, as we saw a very strong trend of selling in early trading.

As for an update on my Lending Club investment, everything is great. Payments have been on time and I have been maintaining my 10.5% return, which is good. Check it out. So, opportunity is right around the corner and times are getting very exciting. Waking up is getting easier and easier. Happy Trading.


  1. Newbie Says:

    FF, it is very obvious the market is being completely manipulated. Here is my theory how, why and by whom.

    Over the past six weeks I believe the government has been been using the likes of Goldman Sachs to purchase equities in bulk, program trading if you will thereby pushing the market up. This is easily achieved with the relatively low trading volumes we've been seeing over the past months. There was no justification for this 27% rally. This has the desired effect of making the common Joe (or CNBC talking heads, etc..) believe things are getting better. The government does it's part by coordinating press "events" and spreading lies, falsifying data, even going out on a limb to say they are seeing "glimmers of hope."

    Obviously at the start of March this was much needed as everyone was extremely concerned while doubting the government, Obama, the economy, etc... However, this extended rally having served its purpose must come to and end. Why? Well, because if the economy was really recovering and people began to gain there confidence back, they would seek additional risk. This would mean less interest in our treasuries, and we have a lot of treasuries to issue to pay for our stimulus, etc.. Obviously the government knows the rally they created couldn't wasn't real and couldn't be legitimately maintained.

    So, today's market drop was coordinated by the government by instructing Goldman Sachs and the like stopped purchasing equities , heck they're likely selling them to make money on the downside. Why? Because it has the desired effect of renewing the flight to safety. Namely the dollar and our treasuries.

    Basically, our government is manipulating this market to their benefit.

    Anyway, that's what I came up with. Take it for what it's worth.

    Happy trading, err shorting... Tuesday.