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Two days after our buy call on March 8th I mentioned that banks were a buy.   At that point the banks had fallen 93% from peak to trough and looked like a fantastic long-term buying opportunity to me.  I never could have imagined they would run-up over 100% in just 8 weeks.  After a 100%+ move and an entire decades worth of nice stock market returns (in just 8 weeks) it’s time to re-evaluate.

I think we’re getting a big tell from two key players in the financial market: Goldman and FAZ, the Direxion 3X Financial bear fund.  Everyone knows Goldman sold shares at the top.  For my previous opinion on GS top ticking the market please see here.  This isn’t the first time GS has sold shares at the top.  Buying from GS is like inviting Lebron James to play you 1 on 1 in a game of hoops – you’re going to lose.  I think the GS sale is signaling an enormous warning sign that perhaps we’ve moved up a little too far too fast.

More interesting is this new Direxion 3X bear fund.  As readers know, I have been very cautiously bullish for the last few weeks because I believe you just can’t step in front of the banks and the stress tests, however I continue to work within the framework that we are in a bear market rally, so the risks in my opinion are still very high if you’re holding shares at these levels.  The only way to play this government intervention has been to stay in cash, fully hedged or alongside of them on the long side, as I’ve said repeatedly you can’t short this market.  That could all end on Monday, but we’ll wait to see the stress test results.

The banks have been and will continue to drag this market around by the nose.  But most traders have become even more aggressively short the banks as the stocks have moved higher.   This has been most evident in the early and late day trading in banks stocks.  How many times have we seen a huge upside move in the first or last 30 minutes of the day which ALWAYS coincides with a 2%+ move in bank shares?  That’s not aggressive buying, that’s aggressive fear filled short covering.  (You just have to love how everyone blames the shorts on the way down and then doesn’t mention them on the way up).

fazzyClick for larger image

This aggressive shorting can best be seen in the FAZ volume.  FAZ has done over 350MM shares multiple times in the last two weeks.  Substantially more than it’s couterpart FAS has done.  Since March FAZ volume has gone up more than TEN TIMES while FAS volume has roughly doubled (roughly 2-3 X the $ weighted volume for those keeping track).  That’s an amazing stat.  The volume in FAZ has come off sharply since then.   I think this was a clear sign that the shorts are beginning to throw in the towel and the upside surge in bank short covering could be coming to an end.  I still maintain that you can’t short these names heading into the stress test results on Monday, but being a buyer at these levels is beyond imprudent.

I’ll follow-up on Monday after we get the “all clear” from the government on the status of the U.S. banking system.

  1. DanH

    I don’t know how you come up with this content, but your blog gets better with every single day. Keep up the great work!

  2. Yoyo rider

    TPC, I second Dan. That is an astute observation. I just checked the volume on FAS and its volume has only had a 2fold change – nothing compared to faz. I was reading on Zerohedge about how buying FAZ was like telling the GS and other traders, ‘Come and get me’ and that sent this rally higher. I just bought into some SRS but will wait till Monday to buy more.

  3. DanH

    I checked that out also. FAS volume has doubled since early march, but FAZ volume is up more than 10 fold.

  4. Gary

    I definitely think there will be a pull back, but the fact is there has been a shift in trader confidence. So if there is a 10% decrease in overall stocks, then I think there will be another rally. This is to say unless something unexpected doesn’t happen such as countries closing down everything due to the disease scare or a large financial institution on the brink of collapse again. I am sure there will be plenty of new bankruptcies following Chrysler and GM. The government really can’t prop up everything, even if they have an endless margin account.

  5. D

    Good insight on the current state of affairs. However, I have not heard it stated the reason the volume is so much higher is due to the tremendous drop in price $115 to $8. We need to look at the dollars traded with these funds, not the shares IMO.

  6. Cullen Roche

    Great insight D. You’ll notice that the dollar traded volume in FAZ has also been much higher than FAS. Roughly 2-3X depending on the period. Great point though.

  7. AlanG

    If long financials currently, is the play to get out ahead of the stress test? I have always been one that was of the opinion that uncertainty = bad, and stress test = huge uncertainty……just curious what everyone thinks. Nice post TPC.

  8. Bradd

    Agreed Gary,
    There must be a number of very sick companies out there who were not wise enough to conserve cash over the last six months getting in line behind Chrysler.
    The sooner the banks capitalize on this private /public trillion dollar crap asset purchase plan
    the better off we’ll all be so we can put this whole discuting mess behind us.
    Then let the perp walks begin as we owe it to those who went through this exact BS in the dirty thirties.

  9. anonymouse

    TPC, you might also want to consider that according to WSJ, GS is the principal counterparty for the Direxion ETF’s.

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