I advise investors to use this rally in the financials to your benefit. If you took recent long positions in the financials, you might consider selling soon.
More experienced and aggressive investors might start looking to take short positions soon.
This market is very momentum-driven so you’ll want to wait for signs of a decline before going short. No doubt, the Fed’s bailout plan for Fannie and Freddie has sparked this rally, but it’s not a rally of substance, just misguided confidence.
While this has certainly been a great week for the financials (even I made a short-term trade in WM), I have little doubt that Friday will add even more volatility when Citigroup (C) reports earnings and discusses guidance. Monday will be an equally big day when Bank of America (BAC) reports.
If investors are pleased with guidance, you might want to wait a few more days, but you should be getting ready to take short positions. Just remember how inaccurate previous guidance has been from the financials. You can use ETFs like SKF (buy it for a short stance) or you can short UYG.
You can even short individual stocks like BAC, WFC, and C. And of course you can always buy puts. Once again, wait for a reversal sign. While it may not be on Friday or even Monday, it will come and the sell off will be big.
What should you buy? The oil trusts of course, specifically the Canadian trusts. Don’t let the correction in oil scare you. In a previous piece I discussed the possibilities of a 30% correction in oil prices over a two or three month period (when oil was over $140). I mentioned it wouldn’t surprise me at all, as oil is clearly ahead of itself, but only in the intermediate-term.
I went on to add that if investors got spooked and sold the oil trusts as oil declined, it would make them that much more attractive since the dividend yields would increase if dividends remain the same. I feel they will (for at least the trusts I like) since these companies hedge oil prices with futures.
While the trusts could decline in price even more from here, you should take new positions or add to current ones, if not now then very soon. I like PGH, PWE, and HTE in that order. I’ve owned PGH for a while, PWE previously and just bought HTE today to catch the $0.30 dividend (too late now since it goes ex-div on Friday). But these trusts pay monthly dividends so there will be much more to come.
Remember…playing this market is like playing the deadly game of Russian roulette, unless you’re a great trader and understand what’s happening. But many great traders will get blown out.
Whether you consider yourself a great trader or a conservative investor, if you dare enter this market you should be looking for companies paying high dividend yields with a history of consistent dividend payout.
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