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).
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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.