This past week saw financial sector dominate trading on the markets. In what has been dubbed "the dash for trash", many of the once doomed financial stocks surged to heights not seen since 2008. Is this simply the new bull market proclaiming the strength of the financial sector, or temporary euphoria before another market correction?

IN PICTURES: 20 Tools For Building Up Your Portfolio

Hank's Back
Leading the way late in the week was AIG (NYSE: AIG), which rose 26% on Thursday alone amidst rumors that former CEO Maurice "Hank" Greenberg may be on improved terms with the company he once built into the largest insurer in the world. Investors are hoping that Greenberg's vast experience and Rolodex of business associates may be able to help new CEO Robert Benmosche in returning the insurer back to prominence.

But a 30% jump in a single day and a 280% run over the course of a month has analysts wondering whether shares of AIG are benefiting from a short squeeze. Following their 20-1 reverse stock-split which drastically reduced AIG's float, short sellers have been frantically trying to cover their short positions. The reverse split has made that task much more difficult for short sellers increasing the stock's volatility thus resulting in this massive run-up in the stock price over the past 30 days.

The volatility won't settle anytime soon, as the reduced float combined with the extremely high open interest in the options market could see AIG shares yo-yo for the remainder of 2009. It's uncertain what to expect from AIG shares in the near term, so perhaps getting into a reverse calendar spread, which profits in volatile markets in the short-run would be a good play here. For those looking further down the road, opening a position in a LEAP would be another viable alternative for AIG.

Higher on Historic Volumes
Two other stocks that have seen a run-up, thanks to a huge increase in volume, are Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), up 225% and 260% respectively for the month. This past week alone saw Fannie rise 75% with Freddie up 40%. Although the price appreciation is something to behold, it's the volumes that have caught everyone's attention. On Monday alone, trading on Fannie broke 830 million, with Freddie reaching 386 million. Considering that just a few weeks earlier trading volumes were in the single-digit millions, these volumes are historical. Some reports have these two stocks, along with AIG, Bank of America (NYSE:BAC) and Citi (NYSE:C) accounting for a phenomenal 35% of the NYSE consolidated volume since Aug 5.

With volumes on these "trash" financials heating up the scoreboards, it's obvious that retail and institutional investors alike are riding a wave of momentum that may well be creating another round of short covers in the coming days and weeks. If these stocks continue to trade higher on these kinds of volumes, shorters caught in the cross hairs could drive prices even higher. However, profit taking in the coming days will slow these financials down and bring some normalcy to the markets. Again, with so much open interest in the options market it's clear that people are betting one way or the other on where this recent super-rally is headed. My guess is Fannie and Freddie may have a little more room to run (10% or so), but profit taking will deflate these two GSEs by Labor Day. If you're looking to make a quick profit by speculating on a pull back, get into a leveraged bearish financials ETF like Direxion's 3x Financial Bear ETF (NYSE: FAZ). That being said, this ETF only makes sense as a day trade. A couple of up-days could compound your losses and eat up your position very quickly.

The Bottom Line
This past week saw financials benefit from high volumes and a possible short squeeze. With so much positive speculation in the sector lately, it might be a good time for contrarians to jump in and pick up some profits on the way back down. Then again, we've been waiting for a pull back for weeks now, and we have yet to see it. Perhaps the bulls will rule a little while longer. (For more, see The Industry Handbook: The Banking Industry.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  2. Credit & Loans

    Pre-Qualified Vs. Pre-Approved - What's The Difference?

    These terms may sound the same, but they mean very different things for homebuyers.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Insurance

    Cashing in Your Life Insurance Policy

    Tough times call for desperate measures, but is raiding your life insurance policy even worth considering?
  5. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  6. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  7. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  8. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  9. Fundamental Analysis

    Using Decision Trees In Finance

    A decision tree provides a comprehensive framework to review the alternative scenarios and consequences a decision may lead to.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center