Falling Down the Wells

10/22/09 Laguna Beach, California –

Whoops!…What’s this?…Bad news is bad news after all?

Yesterday morning, Wells Fargo posted a cosmetically pleasing profit of $3.2 billion, or double the tally from the same quarter last year. So when the opening bell sounded, exuberant investors rushed into the market and bid up the shares of WFC.

But then a very strange thing happened; the buying frenzy dissipated into a selling panic, as a variety of analysts started poking holes in Wells Fargo’s “strong” report. In particular, analyst Dick Bove of Rochdale Securities, complained that the bank’s entire profit for the quarter came from a $3.6 billion profit on a hedging transaction. The bank’s operation’s, meanwhile, produced results that ranged from mediocre to poor.

Bove slapped a “sell” recommendation on the stock, and more than one investor seemed to heed the advice. The stock slumped 7% from its high print of the day to its closing price of $28.90.

Technically oriented traders couldn’t care less about WFC’s income statement mumbo jumbo…but they would probably care a great deal about the textbook “outside day reversal” pattern that WFC etched onto trading screens yesterday.

This ominous pattern features a share price that exceeds both the prior day’s high and the prior day’s low – i.e., “outside” – and then ends the trading session on or very near the day’s lows. A “textbook” reversal pattern should also feature a big surge in volume.

In other words, WFC’s reversal pattern has it all! – higher high, lower low and a huge spike in volume. Yesterday’s trading volume of 113 million shares doubled the average daily volume of the last four months! So if you added up all the component to yesterday’s reversal patter, you would probably begin to deduce that a new bearish trend will unfold over the coming days. Incidentally, the KBW Bank Index (BKX) of 24 financial stocks also produced an outside day reversal yesterday.

This technical formation does not guarantee a selloff, of course, but it does suggest that WFC might stop going up…at least for a while. This pattern also suggests that bad news is actually bad news…which would be REALLY bad news for a stock market that relies more on hope than substance.

Regards,

Eric J. Fry,
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research —  institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

View articles by Eric Fry

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