8 Step Method of Finding the Bottom in Financials (June 11, 2008)
I’ve been getting a fair amount of email from folks who are asking the same thing in different ways. “Dan, aren’t the financials close to bottoming? Goldman Sachs is down to almost $160 and JPMorgan is back down at the March lows! Don’t you think this is a once-in-a-lifetime chance to buy these great stocks?”Well, I’m finding that most things are not working in this lousy market, but some things are. I’m just lazy enough to focus on what’s working and just ignorant enough (or sufficiently self-aware and realistic) enough to know that I have absolutely no way of knowing with any kind of certainty whether the financials have bottomed. Lots of smart folks probably have a big edge in understanding when the risk of owning them is outweighed by the risk of not owning them, but I have embraced the inevitability of missing the bottom in the financials in the same way that I know I’ll never win the lottery (I’ve never bought a lottery ticket).
But to help folks with no edge in analyzing financial stocks make a sound decision regarding buying financials, I recently posted this 8-step plan over on Stock Market Mentor. If you have been thinking about whether it’s right to dip a toe into the financial waters, but have no real working (and accurate) knowledge of the specifics on the company you might be buying, try this preliminary process:
1. Go out to your garage and locate the toolbox that is invariably in every garage.
2. Carefully select the largest hammer you can find. A small sledge hammer would be most appropriate, though I believe you can accomplish the same “Pre-‘I want to buy financials'” task with even a small claw hammer.
3. Once you have located the proper tool (remember — the right tool for the right job), then find a flat surface (avoid the kitchen table for reasons that will be obvious in a moment). If you don’t have a workbench in the garage, even the garage floor will suffice.
4. Grasp the hammer in your dominant hand (the one with the greatest strength), place your other hand palm down on the flat surface.
5. Raise the hammer as far above your head as you can.
6. Now — swiftly and with purpose — bring the hammer down onto the top of your hand with as much force as you can possibly muster.
7. Repeat as many times as is required to take your mind off of your urge to buy financials.
8. Clean up the mess, then walk calmly back to your computer and look for stocks that are working.
Now, I am aware that I might have just inadvertently timed the bottom in financials. I’ll accept that dubious distinction because the risk of timing the bottom outweighs the reward of getting it right. As for spotting the bottom, I’ll use the method described by Justice Potter Stewart in defining pornography — “I know it when I see it.” Aside from the “hope” component in chart analysis, I’m not seeing the bottom in financials.
Free Chart