It seems like just a short time ago when ZachStocks published thoughts on Citigroup’s pre-announcement which got this whole rally off and moving in the first place.  Even with the markets up 8% in just three days, the article stated, “with the current environment, I believe there is still opportunity to profit from trading on the long side.“  And there was plenty of opportunity at that.

Over the next five weeks, the market added to these gains to the point where we are now essentially 30% above the panic low in early March.  That’s enough of a move for the technical experts to call this a brand new bull market.  (I don’t blame you if you object to this term considering we are still 44% below the ultimate high in October 2007.)

In the ZachStocks Podcast from March 14th, we talked about the dynamics of a rally during (or after) a bear market and how fear could actually drive prices higher.  Short sellers were likely the initial catalyst as they feared losses and piled on top of eachother to hit the exits.  Then institutional money managers followed for fear of missing the next move higher and underperforming the market.  Individual investors were likely the last to feel the pinch, kicking themselves for not being part of this tremendous rally over the past month.  The move essentially fed on itself for longer than many anticipated and led to strong gains for those of us who put capital to work.

Today (Friday)  Citigroup is back in the limelight as the company announces official first quarter results.  The company actually reported an operating profit for the first quarter.  However, Earnings per share were negative when accounting for preferred dividends paid, but the company has never let the truth get in the way of a good story.

Ironically, it looks like Citigroup could provide the proverbial book ends to either side of this market rally.  Traders have an old saying which is “buy the rumor, sell the news.” The translation is that you want to be long a stock or a market when good things are rumored to be in store.  Citigroup gave us the rumor in March when they stated that this was looking like a “good year.”

The second half of the statement essentially means that once the rumor has been fully accounted for, the best thing to do is get out.  This is true whether the rumor is confirmed, or whether the rumor turns out to be false.  Once that “hope” is out of the picture, there is little reason to stay long.

As a quick aside, there have been several other “news” releases over the past week which could mark an end to the rumors regarding major financial companies.  Earlier this week Goldman Sachs announced that their earnings beat expectations.  The stock was rewarded with immediate selling.  Now part of that selling was due to the company pricing a secondary offering, but it was also a function of the old buy the rumor, sell the news traders.

And my hat goes off to Wells Fargo who essentially manipulated the market a week ago Thursday by issuing a surprise pre-announcement while many traders were getting an early start to the long holiday weekend.  As my friend and colleague Justice Litle from Taipan Publishing Group stated, “Wells Fargo’s $3 billion earnings number might have some legitimacy to it, that I grant, but even so, those gains came from taking massive write-offs on the Wachovia purchase not long after taking $25 billion (more than eight times as much) from the government.” So the earnings release may have been suspect, but they were enough to push an illiquid market much higher.  The question is whether we are entering the final stages of this impressive bear market rally.

Now that the Citigroup news is out, the stock appears to be giving up some of its gains.  I should be straightforward with you and let you know that I bought a small position in my IRA which I sold earlier today for an 88% gain.  I don’t think the transaction clouds my judgement but I always want to be straightforward with my trading and discussion of stocks.

Volume has been below average every day this week except for Tuesday when the market traded lower.  This isn’t a sign of superior strength and makes me want to play defense more than buying stocks aggressively.  For its part, the ZachStocks Growth Model has taken a fairly conservative stance with more than 15% of the portfolio in cash and a significant position in two inverse ETF positions (these positions profit when the market declines).  Individual stocks can still show significant gains in this type of environment, but it appears this may be a period where it is important to once again protect your capital.