Just a quick note before our meeting tomorrow. In our last meeting, at the very end, we were discussing the idea of what to do with Bank of America (BAC). After all, from Monday March 16, 2009, BAC went from $6.18 to a high of $7.80 on Monday March 23, 2009. This was a gain of 26% in 7 days. As we were leaving I suggested that the best action to take would be to sell or sell short.
Since March 23, 2009, BAC has fallen 23%. This would have meant a total gain of around 47% if bought and sold short without using any margin. The lesson in all this is that significant short-term gains or losses will be offset, over time, with equal or greater reactions in the opposite direction.
How can we determine what is a "significant" short term gain or loss? The best way to do this is to look at a comparable index of stocks in the same industry. For BAC, a comparable index is the financial stock Exchange Traded Fund known as the Financial Select Sector SPDR (XLF.) From March 16th to March 23rd, the XLF was up only 18% While BAC was up 26%. The amount of change on a percentage basis for BAC would need to come in-line with the other stocks in the financial sector index. Since BAC tends to over-react both up and down, we could expect that the stock would go down more than the index, on a percentage basis, as we've seen today.
Because BAC is down more than the index since March 23rd, it might be time to either get out of your short sell or buy the stock in anticipation of it going back to the where the index is. Again, this strategy is only for speculative purposes and not at all part of a reasonable investment approach.
Since March 23, 2009, BAC has fallen 23%. This would have meant a total gain of around 47% if bought and sold short without using any margin. The lesson in all this is that significant short-term gains or losses will be offset, over time, with equal or greater reactions in the opposite direction.
How can we determine what is a "significant" short term gain or loss? The best way to do this is to look at a comparable index of stocks in the same industry. For BAC, a comparable index is the financial stock Exchange Traded Fund known as the Financial Select Sector SPDR (XLF.) From March 16th to March 23rd, the XLF was up only 18% While BAC was up 26%. The amount of change on a percentage basis for BAC would need to come in-line with the other stocks in the financial sector index. Since BAC tends to over-react both up and down, we could expect that the stock would go down more than the index, on a percentage basis, as we've seen today.
Because BAC is down more than the index since March 23rd, it might be time to either get out of your short sell or buy the stock in anticipation of it going back to the where the index is. Again, this strategy is only for speculative purposes and not at all part of a reasonable investment approach.
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