Why I Bought Financials Today

If you’re going to be a trader, and you don’t have to be and trading is not the core of what I do, at some point you have to pull the trigger.  We always want that perfect, can’t lose, super obvious, entry (and exit) point.  But it’s not always that easy.  At some point, when the risk/reward equation feels right, you have to pull the trigger and put on a position.  Otherwise, you’ll never act and you’ll never trade.

I went ahead and bought the financials via the ProShares Ultra Financials (UYG) this afternoon for a variety of reasons:

• Todays represents Day 26, by my count, of the selling stampede began Friday June 6.  These things “tend” to last 17-25 days, according to Raymond James’s Jeff Saut.  At some point, stocks take a break from going straight up or straight down.  I think we’re close to that point.
• At 1225, the S&P is 15% off its recent high (1440 on May 19th), has pierced previous lows (1255 on March 17th), and should have some support around 1220 which represented the low during the Summer ’06 selloff (also see the last chart in this post by Tim Knight from this morning).
• The troubles at Fannie and Freddie have been the catalyst for the latest leg down and yesterday’s intervention by the Feds seem to provide a short term resolution to this issue, thus taking Fannie and Freddie away as potential further downward catalysts in the short term.
• The financials themselves, as measured by the XLF, are down 36% from their recent highs (May 2nd), are 35% below their 200 day moving average, and volume is at levels we saw during the climactic Bear Stearns selloff (XLF YTD Chart).  The selling during the latest down leg has focused on the financials and any bounce should therefore be led by, and strongest in, them.
• Can the news get any worse?  IndyMac, the nation’s 9th largest mortgage originator in 2007, failed on Friday and was taken over by the government.  The Treasury and Federal Reserve intervened yesterday to prop up Fannie and Freddie.  As long as “the system holds together” can things get too much worse short term?

Maybe we get another capitulation day in short order, a huge selloff and a spike in the VIX into the 30s.  If so, then I’m early.  It’s certainly very well possible that this does happens.  Trading is art, not science.  Nobody knows exactly what will happen.  But I’m willing to put some money to work here.

Disclosure: Top Gun is long the ProShares Ultra Financials (UYG).