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Are We There Yet?


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Stocks took a wild ride on Friday as we are trying to search for a near/long term bottom. More fear on Friday struck Wall Street regarding financial firms and their ability to stay afloat. FNM and FRE both opened sharply lower on fears that the government may not step in and “explicitly” support the government sponsored entities. Volume was running hot all day long and finished higher than Thursday’s run rate. New Lows surpassed 1200+ while VIX and VXN both spiked hard but falling short of signaling capitulation. Stocks remain in a bear market and will continue to do so until we get some real fear in this market.

On Saturday, federal authorities seized IMB as a 1930s style bank run occurred as depositors withdrew billions from the bank. The FDIC insured bank was helpless as “sketchy” and down right ridiculous lending practices lead to the demise of the bank. Depositors will now receive full payment up to $100,000 and 50 cents on the dollar for any amount exceeding the $100,000.  IMB will be the second largest federal takeover of a bank ever!

It should be interesting to see if IMB sparks a classic bank run like we saw in the 30s.  Whether it does or not it should provide a bit more fear about banks going under.  UMPQ is a bank where I had a discussion with a woman who owns 30k shares.  A family friend, she was talking about her stock and I quickly ran and got my laptop to check out its chart.  My wife and I were vacationing at her home in Sunriver, OR and immediately told her I would dump the stock.  The issue here was she helped start a bank that was eventually bought out by UMPQ.  Back in July ‘07 the stock was clearly in a nasty downtrend.   Today, UMPQ still is sporting its nasty downtrend and may be a bank that could see a run on.  Do not get me wrong, I hope THIS DOESN’T occur however anything is possible.  I am avoiding financials like the plague, not sure why anyone would want to jump in while the water is still, clearly muddy!

VIX and VXN continue to be “low.”  I had the opportunity to speak with an individual who had graciously share that some large institution was handling a large quantity of employee options.  There is a debate if the VIX/VXN have sufficiently signal a bottom.  Afterall, both have moved almost 100% off their May lows wouldn’t that show enough fear?  One explanation that was given to me was the large, LARGE amount of employee options that had hit the market forcing this large institution to sell volitility (vol).  What this creates, a low VIX and VXN.  Therefore, if this large institution was selling vol than VIX and VXN have moved sufficiently because the indexes are “artificially” low.  But, in my experience if a financial instrument are “artificially” low or high they tend to OVER correct on the other side.  In this case, VIX and VXN aren’t sufficiently pricing in fear and will overshoot at some point.  The bottom line, we haven’t seen our ultimate lows leading up to a new bull market and we should continue to wait patiently on the sidelines.

During bear markets you do see incredible moves to the upside, just go research the few months after the September 11, 2001 terrorist attacks on NYC and Washington DC.  It wasn’t’ until a year later that we saw our ultimate lows and the following March when stocks were actually in a confirmed rally kicking off the huge 2003 bull market.  There will always be tradeable rallies during bear markets but keep in mind that profits must be taken quickly and longer term positions should not be built up unless you have $100mm to trade.  Just look at Doug Kass and Vince Farrell over at RealMoney.com loading up on financials and getting hammered for it!  At this point, the charts are saying more pain to come just simply step out of the way!

Enjoy the week!

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