One thing that’s essential is enormous volume. With gigantic volume you can read the markets true opinion – we will need outsize volumes to be able to say ‘Okay, the bottoming or topping has occurred’. It won’t be the end until investors have just given up and don’t even want to talk about these names.
– Douglas Peta, Vice President, Market Strategy, J&W Seligman
Barring another bank failure or some other unforeseeable catastrophe, I believe today marks a short term bottom for the financials.
That’s because I think we saw the kind of fear and capitulation that exhausts selling and tilts the balance of supply and demand towards the buyers.
The convincing case to me is the terrible price action combined with enormous volume.
Let’s start with the most well known and used vehicle for trading the financials: the XLF. Today, 469 million shares of the XLF traded hands – 50% more than the previous all time of 311.7 million shares last Friday (July 11). Even during the Bear Stearns debacle, the XLF never traded more than 300 million shares a day (XLF YTD Chart). That’s capitulation baby.
Next, let’s look at the ProShares Ultra Short Financials (SKF) ETF. This is a popular way to bet against the financials. The chart has gone parabolic on climactic volume (SKF YTD Chart). The 36.7 million shares of this ETF that traded hands today is also an all time record.
Finally, let’s look at the ProShares Ultra Financials (UYG) ETF. This is a popular way to go long the financials. Prior to June 24, 2008, the fund had never traded more than 50 million shares in a day. From June 24 to July 10, it traded more than 50 million shares 3 times. It’s traded more than 50 million shares each of the last 4 trading days, including a record breaking 105.3 million shares today (UYG YTD Chart).
This kind of immensely negative price action coupled with enormous volumes is characteristic of turning points, as pointed out by Douglas Peta.
That’s because it represents an enormous amount of sellers exiting at the absolute bottom, after hoping for a bounce all the way down, unable to take any more pain. And it represents an enormous amount of buyers entering the market at what they feel are bargain basement prices. At these points, the balance often shifts between supply and demand leading to a reversal in price. To put it another way: most of the sellers are gone now and there are a lot of potential buyers. That’s a recipe for higher prices.
Disclosure: Top Gun is long the ProShares Ultra Financials (UYG) ETF.
UPDATE (Wed 7/16, 5:15pm PST): The Wall Street Journal Online’s MarketBeat blog cited this call in its daily Four at Four post today: “Four at Four: Party Time?”