CHESSNOID

The stock market had two great up days and had its best close in awhile. Unfortunately, this looks like the making of a bear market trap. A very good one too. Nothing has fundamentally changed. There has been some upbeat news about Wells Fargo and crude oil has closed down now 3 days in a row off $15 from its recent high.

Don’t get me wrong, if you are in the market you definitely made money or recovered some of your losses. However, if you stay in it you will be hammered. I actually shorted the market in my Updown simulation account, and got completely clobbered. I mean it was a disaster. I was down basically 30% in two days. I bought in after the banks rallied on day 1. I thought I bought at or near the top, and again was betting it would go down. Instead the stocks went higher before the end of the day. On day 2, the stock market rallied even further up about 10% or more. In short my simulation account went from $1.2 million down to $900,000. OUCH!

It is obvious I made the wrong call against the market but I think the financials will go back down soon. It was such a beating I am not sure it will come back for me to recover $300,000. One of the reasons I felt the bank stocks would go back down is because earnings are all down and losses are all higher than forecasted. When Wells Fargo put out its positive earning and increased its dividend, I thought that was well timed but I know they are manipulating their books. By that I mean, they recently changed their accounting practice to either hide losses or delay their accurate reporting.

Net charge-offs increased to 1.55% from 0.87% but dipped from the first quarter’s 1.6%. The San Francisco bank changed its policy on writing off defaulting loans in April. Instead of writing off a defaulting loan after 120 days, the bank now waits 180 days, potentially postponing a major hit to earnings.

In my opinion (from a collections point of view) this is also known as cooking the books. Whenever you change a policy to benefit reports so investors don’t see true results, it later catches up to bite you even bigger. In this case, Wells Fargo put off charging off accounts for 2 months. If they had kept with their original policy, then they may have actually shown a loss. I wonder why all the other big banks didn’t do the same thing to inflate their numbers to make the reports look better? (Maybe because it borderlines fraud against investors, hmmmm. Just a thought.) Of course all the other banks rallied because investors are taking this as an indication that the worse is over. That is why I believe this is a bear market rally trap. Tomorrow will be options expiration so I think that may have also had something to do with the 2 day rally. If you are a trader, I would recommend closing out your positions everyday to lock in your profits. I didn’t because I put limit orders in that didn’t execute during the day, and I didn’t have time to go back and close them out before the close of day. If this was real money, I think all my hair would have turned gray.

I still believe the stock market is trending down and any rallies will be short lived. We have another wave of bad loans ready to hit both the stock and housing markets like a financial tsunami. Read DrHousingBubble’s post here:
Stage Two of the Mortgage Collapse: $500 Billion in Pay Option ARMs Meet the Piper in 2008 with 60 Percent Being in California.

There are others who state the same thing, but DrHB usually backs up his information from good sources. These guys predicted the housing bubble before anyone on TV would dare say it and all the economists laughed them off as conspiracy nuts (which includes Bush, Bernanke and Paulson who are all wiping their faces off of Crow Pie). So this 2nd wave of defaults will make housing affordable for everyone soon. These are not the same as the subprime mortgage mess. This separate event will hurt even more because the housing bubble has already burst.