Investment Capitalist

The Fed defended a critical technical level in the broad markets today; without the slightest doubt that he was trying to have the greatest positive impact on stocks. The Plunge Protection Team was out in full force, shotgun spraying liquidity into multiple asset classes. It took at least 25% of the Federal Reserve’s balance sheet to try and shore up the American side of the mess, and about $45B from the Europeans. That’s a lot of mortgage held by people in cities that may never have even seen the American mid-west on TV, let alone know their tiny mountain municipalities are exposed to this junk.

The market spike today is very deceiving. Everyone seems to be screaming that the “percentage gains” were eye popping. In reality, what’s really eye popping is these percentage gains still have only managed to erase the losses from the prior two trading sessions. Freddie Mac (FRE) was up double digits and would still have to rally 50% just to get back up to the February lows. In other words, that was one hell of a plunge we took and it’s obvious once again the Fed watches critical technical levels. Yes, even Bernanke looks at the occasional chart because it’s all really about behavioral finance, isn’t it?

Here’s something that’s got me scratching my head: Five year T.I.P.S. went into a negative yield. That means smart money is suggesting inflation protection is worth a negative yield. Is that bizarre or what? Something more bizarre is the fact that Steve Schwarzman’s Blackstone Group (BX) was up on Monday’s close while the market closed on its lows. They do have a very well connected board that was probably privy or in some cases, consulted on the Fed decision, as this was a multi-lateral operation by central banks.

The bears are gonna come swinging back in a couple of days. There is nothing more of a tell tale sign for a bear bounce then the sheer size of the rally before anyone was able to blink. So although the idea of patient and drawn out accumulation of a financial, and perhaps housing sector, portfolio stands. It is and will remain a long-term operation. But you hopefully took some gains and reduced the cost basis on those positions. If one takes advantage of the current market volatility to ad very small incremental gains to a core position as it is being accumulated, the little gains add huge points when you compound it out.

Closer inspection of individual names suggests this thing’s got a lot of potential if we actually see a follow through early on Wednesday. If not, forget it, we’re going to correct a bit of Tuesday’s move. And since the financial s are the most powerful movers, and this is where one’s intense gaze should have been for the past several weeks, this is where it should stay hence.

Citigroup’s (C) January 21 low of $22.36 is above Tuesday’s close by about 4%. That should put things into perspective a bit.

Stocks in similar long-term patterns as Citi, which did not break their multi-year lows are excellent medium term trading opportunities. Comerica (CMA) is a perfect example. $37 to $55 is the range in play. I bet CMA will test $38 then run higher.

Short term though, it is likely to be the sickest stocks that will rally hardest and farthest.

Here’s an interesting technical set up that speaks volumes, literally:

Credit Suisse’s volume on Tuesday was one of the highest days in a very long time. This is indicative of exhaustion. In other words, the rally could fade quickly if it isn’t already done with.

Eaton Vance is an excellent medium term long. The reversal creates a bear trap and the chart looks like a long-term growth track from a textbook. Perfect. $30 is an incredible value for Eaton Vance (EV). This is a company that manufactures cash! Their free cash flow is off the charts and they run very lean. This company is set up to withstand the current headwind. This is the kind of defensive play one should look for in current environments. But humility is also a virtue and I’d be very happy with a quick 33% gain if I were you.

Take a look at this chart of Wachovia. The time scale is Quarterly. The point of focus here is on volume. Look at the wholesale liquidation of this stock over the past several quarters:

I think the long-term owners have cashed out. Let’s see if this company makes it through this current credit turmoil alive. I don’t think the Fed is going to bail all of the banks out. This won’t end without a few whales getting taken out behind the shed and shot. But like I said, the sickest will rally hardest and farthest.

Bank of America (BAC) displays here a good example of her relative strength and overall health, even with the indigestion of swallowing Countrywide.

Any weakness (hopefully says 9 out of 10 traders that missed this rally) would be an opportunity to “mind the gap”, as they say in London’s tubes before the stampede takes hold and moves you through the train. Same goes for BB&T (BBT).

Volume climax anyone? Changing of the guards done with? The stock has changed hands folks. Look at Bear Sterns (BSC) below:

Cowen Group (COWN) is a stock that is growing aggressively in Asian markets through strategic acquisitions recently. At a PE of 9, with little (if any) business in residential mortgage, this is a value play that’s been incorrectly thrown out with the bath water.

A couple of regional banks to keep an eye on for a pullback are Citizens (CRBC) and Fifth Third (FITB). Both of these stocks are priced very cheap and are offering yields around 8% to 9%. Free cash flow is good, their PE and Price to Book ratios are very attractive as acquisition targets.

There’s absolutely no way to predict how the market is going to behave in the near term. This is where the “chaos” meter spikes off the charts. Pure random noise. But one can, if one so chooses, to react based on certain “tactical” guidelines. I would prefer to see some retracement early in the trading day, a base to develop over several hours, and then a continuation on Thursday and Friday for another 10% to 15% from here. These short term bear market rallies are hands down the best market environments to trade the bull side. The problem is that it would also require sitting on one’s hands for several days, weeks even, keeping the powder dry. Since most full time traders can’t sit out from the market for sustained periods, there is a tendency to give gains back. Ah the beauty of student life.
Disclosures: None