oftwominds-Charles Hugh Smith

Is the Financial Tide About to Ebb? 

April 18, 2009 

Though I don't offer any investment advice, I do report my own decisions from time to time. Based on my own analysis and judgment I recently shifted most of my IRA into the Financial Bear 3X ETF.

The single most powerful investment concept is that going against the trend destroys your wealth and riding with the trend increases your wealth.

It sounds so simple, yet very very few make large gobs of money in the market. We can thus conclude that identifying and riding the trend is not as easy as it seems.

Now before we proceed, let's cover two key issues:

I don't offer investment advice. What I do is present my own amateur-investor decisions from time to time for free, and occasionally offer up charts and commentary from readers like Harun I., also for free. Do your own research, analysis and decision-making. If I haven't pounded "This is not advice!" into the ground enough, please read the HUGE GIANT BIG FAT DISCLAIMER below a few more times.

If anything on this free site provides useful grist for your own research, analysis and decision-making, a donation to help keep the site up and running is most appreciated. If you run out and make $100K based on today's chart and commentary, please don't forget those providing the milestones on your path to wealth.

In describing my own analysis and actions, I am NOT OFFERING ADVICE.Sorry for shouting. I am an amateur and a blatantly crazed speculator in all things, so caveat emptor etc. No one can make sound decisions for you except you.

OK, now let's get down and dirty in pure speculative bliss. Yes, I mean going short, and not for a measly 4 yards, I mean deep, I mean stepping back into your own end zone from scrimmage on the one yard line, dodging a couple of huge scary tacklers and launching a Long Bomb far beyond the wide receiver you glimpsed downfield, I mean a toss at the outer extremes of your capability, one that feels right as it rolls off your fingertips and you think, Man, this might work, even as a linebacker knocks you to the hard turf and you can't breathe because the guy has fallen on you and you wait for the crowd's roar or sigh to reveal whether the Long Bomb dropped futilely to the ground, was caught or intercepted somewhere out around the other team's 20 yard line.

OK, enough football metaphor; I think it's abundantly clear now that I am indeed a crazed speculator. Let's look at a chart of an ETF (exchange traded fund) I bought on Thursday and Friday in my IRA:

Let's start by noting this is a "bear" (short) fund so it moves inverse to the financial stocks. When they drop to lows then this fund hits its highs; when the financials rebound smartly, as they have since March 6, then this fund plummets to its lows. As a 3X fund it it leveraged 3-to-1, so every move is exaggerated up or down (much like an option).

The "rational" investor reading the MSM financial news about the stock market having lots of upside and the banks being all fixed and profitable looks at this chart with a mix of horror and fear. Wow, this looks "risky," doesn't it? Well, it was certainly risky to buy it at $100 and hold it until $9.

Perhaps we should define risk. Risk is holding a position against the trend. The "trend" is supposedly up as far as the eye can see, now that the financial sector is on the mend and making huge profits again. Those who believe this will run away from FAZ in order to buy more C, BAC, GS, etc. (Citicorp, Bank of America, Goldman Sachs, etc.)

This is a chart of a robust, extremely stable financial sector. Uh, is that really what we have? Or do we have a painstakingly crafted simulacrum of a "healthy" financial sector, a duct-taped contraption of lies, obfuscations and gaping omissions? How can Goldman Sachs just leave out December in their financial statements and not be accused of criminal negligence or worse?

Where are our fearless Democratic regulators? Cowering under their desks, it seems, lest the Financial Mafia break their kneecaps for questioning Goldman Sachs and its henchmen in the Treasury? Talk about collusion; imagine Apple or IBM or Sears not reporting December 2008 because doing so might have punctured their phony "profitability."

I look at this chart and see a trend change is about to occur. That's my analysis and based on that I bought this leveraged inverse fund, which acts like an option that doesn't expire (at least that's my view).

I see the following evidence that a trend change is in the wind:

1. MACD is divergent, meaning it's rising even as price declines to 52-week lows.

2. Stochastic is extremely oversold.

3. Price is dragging along the lower Bollinger Band, and the bands are contracting as volatility decreases. Low volatility leads to high volatility, as I noted last Monday in highlighting the VIX: The Stock Market: Poised for a Pause--or a (Brief) Reintroduction to Panic (April 13, 2009).

4. The last time these conditions were met FAZ more than doubled.

5. There are significant open gaps in the chart which will likely be filled at some point. That would require price to move up from $9 to $17, then to $19, then to $31 and from there to $92.

That's impossible, right? Just like it was impossible that Citicorp would fall from $40 to under a dollar, right? Now that all the financials have doubled, tripled or quadrupled, this inverse fund has fallen from $100 to $9, leaving big gaps behind which have a nasty tendency to get filled at some point:

down Apr-09-2009 17 to 14.45

down Apr-02-2009 19.06 to 18.39

down Mar-23-2009 30.78 to 29.54

down Mar-10-2009 91.8 to 87

down Nov-24-2008 143 to 138.745

Could this Financial Bear ETF actually rise from $9 to $90? I have no idea. But I do think that if the truth were revealed about the U.S. financial sector's true losses and actual risks, then their recent euphoric leaps would retrace with alarming speed to their recent lows.

Right now the Financial Media SIPs (standard issue pundits) are all crowing about how "the market has bottomed," "the banks are healthy again," "the market has lots of room for upside," "the stimulus is working," etc. etc. ad nauseum.

Nice, but what if reality intrudes on their carefully manufactured fantasy of financial recovery/stability? The question boils down to this: can they keep a lid on reality indefinitely? Perhaps. But this chart is suggesting to me that reality cannot be hidden away behind lies and secret machinations forever.

The Financial Royalty is demanding that the tide of reality cease its ebbing, and since the tide has risen for six weeks they are congratulating themselves on their immense power and craftiness.

Let's see what the financial tide does for the next six weeks before pronouncing them Masters of the Universe. Gaps have a nasty tendency to fill, just as the tide ebbs.

HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

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