The Basic Financial-sector short play

By Daniel U. Alvarez

PEREIRA -- Stocks and commodities rallied world-wide yesterday as a result of the Federal Reserve-led “coordinated action” to provide low-cost emergency U.S. dollar loans to European banks.  The benchmark U.S. Treasury 10-year note yield rose two basis points to 2.09% early Thursday morning while most European bond yields continued to drop for a second day.  Not too surprisingly, U.S. stock index futures are dropping this morning snapping the 400 point Dow Jones surge yesterday.

Focus of the Day

The most impressive sector gains yesterday were in the U.S. financials’.  JP Morgan increased the most by 8.44% followed by Goldman Sachs by 7.84%, Wells Fargo 7.39% and Bank of America by 7.09%.  The second head-line news report of the day is tomorrow’s job report.

Short Financials

Accordingly, the cliché “Opportunity doesn’t knock twice” may apply to today’s strategy in shorting the U.S. financial markets.  This is especially going to be true if the “shock therapy” provided by the seven central banks yesterday does not stick.  The gains made yesterday by the banks are tenuous at best.  Any negative headline news and the frothy gains made yesterday in the financial sector will be blown away. 

My biggest concern with shorting the financial market prematurely is tomorrow’s employment report.  A positive jobs report will continue to bolster the financial sector.  I am looking at a favorable jobs report tomorrow thus setting the conditions to pull the trigger after the jobs report.

I will be monitoring $FAZ very closely throughout the day and may place purchase a block if it tanks…say to around $39.  Yesterday $FAZ closed at $41.33.  I also like the steep drop $FAZ took from $55 a few days ago to its current price.  I like playing $FAZ but I still think it is too high to get in at this point.  I remember getting in at around $39 early November and riding the wave up.  It’s a good play and its worth dusting-off the playbook.