Great Trades

Just as our trading model was a little early getting short for the beginning of the year, it was a little early reversing to long before yesterday's selloff. We'll continue to fine tune our model to try to get better timing. However, we believe the market is set up very well for a nice rally now.

With the market averages selling off and bouncing off important support levels, and then rallying to form a hammer candlestick pattern for the day, a good bottom indicator, today was a key reversal day which should reverse the trend of the market and start the next rally. There's a huge amount of pessimism about the market now and lots of new shorts, particularly in the financials sector, where there have been lots of negative headlines.

Rumors about Citibank and Bank of America getting nationalized and wiping out shareholders sent both stocks down over 15% today, despite the market reversal. Both companies have their quarterly earnings reports before the market open tomorrow, and as long as they're not horrible surprises, the squelching of the rumors should spur a huge short squeeze in the sector.

Many novice shorts have shorted financial stocks, either directly or through inverse ETF's, in a bet that the major banks' shares will get wiped out. We don't think they will be, at least not in the very near future. The government bailouts nationalize their losses, but they don't wipe out the shareholders as many expect.

With Financials extremely oversold, our trading model added a 100% long position in Financials today, giving it 200% long exposure. Only the most speculative traders should use leverage to get to an over 100% allocation. Others would do well just holding on to 100% long.

For those looking for an individual stock to trade in this rally, Bank of America (BAC) is likely to move up strongly from its severely oversold (and overshorted) condition as long as their report in the premarket isn't a disaster.

Open Positions: 50% long S&P 500, 50% long Dow Jones Industrial Average
Also, for speculative traders, an additional 100% long Financials (XLF is the Financials ETF)