Bottom in Place?

This last week was out of control. I wish there was a better way to describe it. The volatility seen in the financials, specifically GS and MS was just absolutely silly. I remember I jokingly said on our morning meeting last Monday that GS could go as low as $80 and MS to $10 (they were trading at $140 and $33 at the time). Those are ridiculous prices for these stocks. And boy was a I close with those. As both stocks were getting close to my long term buys they looked so weak that I didn’t think about raising my bid. What a mistake that was.

Now looking at the bigger picture I am going to make the bold statement that we have put a bottom in place for the market. As I will outline below there are many factors that lead me to this conclusion:

1. The volatility index is at high levels. There is still high levels of panic in the market place. The panic is reflected by the wide ranges seen in stocks (3-5 times the average for most stocks), indexes, currencies and gold.
2. There are no more risky financial companies left to crush. Unfortunately, specially for those who lost their jobs, this market turmoil had left us with two less big houses Lehman and Bear Stearns.
3. The government is taking a more proactive role to keep the system afloat. Namely bailing out FNM, FRE and AIG.
4. MER got bailed out before it got crushed. There was so much panic that at some point the arb spread on the BAC/MER deal was around 35% the day after the deal was announced. That is just a way of the market saying that they didn’t think the deal was going through. Normally a deal that is expected to close would have a spread of around 5-8%
5. The bottom always looks the worst. And trust me, things looked very scary last week. They looked so bad that I couldn’t even see the big picture and refused to bid higher for those long term buys in MS and GS at silly prices.
6. Lastly, and my personal favorite, the general crowd saying the market is going to go much lower. Over the past 2-3 days I have received calls from family and friends I have not spoken to in years asking if I was doing okay. Most of them were in such panic mode that the financial system was in so much trouble that some of them even suggested I changed careers. HA!

You see, I do not particularly like to make bold comments like markets topping or bottoming. But the reality is that there are so many little clues that lead to the same conclusion. There just isn’t that much downside from here. It seems to me like the path of least resistance for the next few months is to bounce. We had a strong rally on thursday afternoon into the close, followed by a huge gap in the financials on friday. I think if we start to consolidate a bit and we can hold some higher prices we are due for a good bull leg. But as we always say that does not mean that on monday I’m coming in and loading up across the board. I need confirmation from the inside market and thus when seeing those things that confirm my bias I will play the long side aggressively.

I have to give it to Bella for that great call last weekend about this being our super bowl of trading. This past week was spectacular for our desk. Most of us went out of our comfort level and traded stocks we normally wouldn’t and we killed it. In fact, I had planned on spending a week vacationing Cartagena in Colombia with my family and I decided to postpone the trip so I could trade next week. I flew to Bogota, Colombia on Friday afternoon with Ms. Casey for my sister’s graduation but flew back today Sunday to get ready to pounce next week. Time for me to get some real rest. People in Bogota certainly know how to do a graduation party. Get some rest everyone it should be another fun week. choparazzi.

Leave a Reply