Yesterday’s weakness in stocks was attributed to “concerns” about the banking system. At least, that’s what we heard on the car radio while we were out doing some errands Monday morning.  Funny how these supposed concerns can pop up at any hour of the day, often for no apparent reason. Scarcely ten hours earlier one might have thought investors hadn’t a care in the world, let alone grave worries about the health of America’s banking system. It was late Sunday night, and we were just about to turn in as the electronic index futures wafted blissfully higher, up more than 12 points in thin trading. The action implied that DaBoyz were intent on opening the Dow Industrials about 100 points higher on Monday morning. This prompted us to put out a late-night bulletin telling subscribers to buy some April 130 calls in Goldman Sachs, since we hold an option position with slight risk above that price. We advised buying the calls for 2.20, since Goldman shares have been leading the stock market higher and looked like they were capable of leaping the ten points that would have tripped our “yellow alert.” Adding to our nervousness was what we have dubbed the Banking Magic Act of 2009. It arrived last week in the form of an accounting change by the FASB that, with the wave of their wand and a little fairy dust, added hundreds of billions of dollars to the banks’ bottom lines. Why take unnecessary risks when even the most carefully constructed trading strategy can be instantly undone by such wizardry, right?

A Goldman Surprise

So there we were Sunday night, ready to pay up for some April 130 calls in Goldman when the opening bell rang Monday morning. Imagine our surprise on awakening to find Goldman shares getting whacked hard in pre-dawn markets. We wound up buying the calls for 1.34, about 40% less than our original bid.  Then we put out an update in the chat room cautioning that the selling seemed as phony as the buying that had driven stocks sharply higher the night before.  About the only thing that wasn’t phony was selling in Gold that has grown relentless of late. We’ve been expecting the Comex June contract to make a tradable low a smidgen beneath $850, but it’s too early to predict whether this will coincide with the return of sanity in the stock market. Indeed, it is when the stock market seems blithely unconcerned about the banking system, as it has for the last several weeks, that we grow concerned ourselves that investors have taken leave of reality.

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