“Thank god for financials and homebuilders - without them my portfolio would be a disaster!”

For all those who think shorting is easy, ask the fellas who stuck around too long in Ultrashort Financials (SKF).

5 weeks of gains erased in 5 days. Even within the day today this position went from $150 to $120! Talk about an intraday reversal - a terrible start in financials, followed by a day long rally. Remember the SEC has banned naked short selling in 19 major financial firms. I did not write about this last week because frankly it makes one who follows the market for years, quite peeved. (to be judicious) Technically naked short selling should be banned period (from all securities) but it’s been allowed on a wink wink basis. Why? Because the same 19 financial firms have trading desks (and clients) that have used it to great benefit for years on end. Only now when their stocks have been targeted have all the King’s Horses (and Men) found an issue with it. It’s such a corrosive system I don’t want to even get into it because I’ll create a 10,000 word entry. When the foxes guarding the hen house get the guns aimed at them, they run to mother (nanny state) and ask for help. Being the large political donors they are, mommy is happy to oblige.

Anyhow that is neither here or there - this is a ban lasting until July 29th and seeing how great it has worked (already) in the financials just on the “threat” (last week) it would not be surprising to see it extended for another 30 days. We shall see. Why this rule has not been extended to all stocks is beyond me, but I guess we need to let these 19 firms continue to make money naked shorting the heck out of defenseless small cap firms.

So where we stand now is that S&P 1275 level we’ve been pointing to is now here. This was a long term support level that broke down in the recent thrashing of the market, so we’ll see if this previous support level has turned into resistance or if the market can rally right through it.

The major banking indexes, after a tremendous move up have also now rallied to a key resistance level - they poked their head over late today.

While it is tempting to begin building the Ultrashort Financials in scale here, we have seen how being off just by a few days in Ultra Financial (UYG) can cost a lot of dough in the near term.

So I’m still sticking to a Friday time table for really beginning to layer in this position (the “rotational rallies” of January and March lasted from 6-15 days and Friday would be day 9) but if we see SKF back in the $110s tomorrow? (50% fall off in just over a week!) we might start throwing layers in. And start to draw out of (sell) its inverse, Ultra Financials (UYG). Any rally led by worst of breed is not one to be trusted as those who bought these stocks off their huge oversold bounces in late January and March can attest too. The thesis “then” was the 2nd half 2008 recovery and the thesis “now” will be “gas is going to $3.40 and the consumer will be back in full force”. Remember, for stocks to rally for a few days/weeks/even months - thesis does not have to be correct - it only requires enough billions/trillions of pooled capital believe it and move stocks in the right direction. The open question and unknoweable is how long this “perception” remains before the inevitable return to reality.

And to close out our backwards world, Washington Mutual (WM) just reported a loss of $3.34 instead of analysts $1.05, and early indications show the stock up on the great news.

This has continued to be a wacky time for the fund - up 3% yesterday in a flat market and gave it all back today in an up market. No sense. No rhyme. No reason. Just traders flowing from 1 sector to another. You simply have to suspend all logic at this moment or the market will send you to the insane asylum right quick. Our “barbell” approach (owning a few of the things we have zero belief in to counterbalance things we do believe in) is finally paying off - but that side of the barbell is so minor, it is not helping us much; just creating a few offsets to some big losses in the global growth names.

Long Ultrashort Financial, Ultra Financial in fund; no personal position

Last 5 posts by Trader Mark

• Boston Globe: What Would a 2009 Depression Look Like? - November 19th, 2008
• Perfectly Hedged - November 12th, 2008
• Earnings for Perfect World (PWRD) and Energy Conversion Devices (ENER) Both Solid - November 10th, 2008
• Sequenom (SQNM) "Misses" But We Really Don't Care - October 30th, 2008
• Thoratec (THOR) Smashes Earnings; Somehow Guides Up - October 30th, 2008