Monday, July 28, 2008

Fi-Fie-Foe Financials

Due to technical difficulties as in my internet connection being unavailable for most of the trading session, I'm again forced to kluge together another blog that hopefully will be of some passing use and interest. In regards to last week's query, “Are we in a new bull market or is this rally just another bear trap?,” today's action should leave us with no question that the bear isn't about to go back into hibernation. All of the indices are heading to the outhouse with the financials leading the pack. It's been speculated that last week's rally in this sector was due in part to massive naked short covering that, by the way, will end tomorrow unless the SEC decides to extend the ban (which it should!). Most of the stocks affected by this short squeeze have already rolled over and their charts are not pretty. Not only do the charts look butt-ugly, but the news across the board looks pretty grim as well. It was reported today that credit card deliquencies are up sharply compared with a year ago which bodes even worse for the already ailing companies in this space: Visa (V), American Express (AXP), Citi (CIT), Discover (DFS), and MasterCard (MA). The best of the bunch by a country mile is MasterCard but even that has gotten a 20% haircut in the past couple of months.

Are there any good plays here?
There are a multitude of good plays--pick a stock and short it--but there are a few that are more compelling than the others.The risk adverse investor might want to take a gander at the SKF, the Ultra-Short Financial ETF. It's recovering from a recent low and is trading around $142. I'd hop on that train and ride it until the VIX trades above 30 (it's now at 24) and then jump off. The last time the VIX hit 30 (July 15th), the SKF was trading at $200, a 40% increase over today's close.

Next on the list is American Express, AXP. Since inception, this stock has been a steady eddy until last summer when the credit crisis began to unfold. Since then, the stock has dropped over 40% and has broken to a new five year low. The monthly chart view is very bearish and could be a great shorting opportunity down to the $30 level at least for a 14% return.

My final pick is market bellweather Merrill-Lynch, MER. It has the worst looking chart of the major financial institutions although Goldman-Sachs (GS), Lehman (LEH) and Morgan-Stanley (MS) are not far behind. Currently, Uncle Merrill is threatening to break an almost ten-year low put in a couple of weeks ago. Minor support is at $20; major support around $16.

No, folks, the fun in the financials is not over. The market is handing us a bunch of sour lemons so let's make some sweet lemonade. Drink up!

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