Why I am shorting my own broker (ETFC)

During the past 3 months etrade financial (ETFC) has seen its stock rise by more than 25%. For this reason I think its time to analyze wether this kind of move is sustainable fundamentally as well as the technically but first I would like to share a story about perhaps the biggest investing mistake I ever made.

A Personal Story

Back in 2008 when stocks finally had reached their bottom I figured that financial stocks would be the first to recover given that in almost every single recession the banks and investment firms are always the first to recover after an economic downturn. Instead of picking Citigroup (C) or Bank of America (BAC) for my investment I instead decided to invest 10k into the very own online broker I use to execute trades (etrade). I held on to this investment for almost 2 years with no movement. There were run ups here and there but it always seemed like anytime this thing was above $15 a share (or $1.50 a share before the 10:1 reverse split) then it would come crashing down fast and furious. I held on to this position for 2 years hoping etrade would be one of the first brokers to recover from this downturn but this never happened. They went on posting losses and after every quarter that it seemed it would at least break even they would follow on with another quarter worth of losses. I eventually gave up on this position still worth almost as much as when I first bought into it. I concluded that this thing is simply stuck in a range and the only way to make money out of it is to trade it by buying at the lows and selling at the highs. Fast forward to the most recent quarter and this thing is still posting quarterly losses. Lets look at the fundamentals:

Fundamentals

Recently analysts expected etrade financial to post a net quarterly loss of -0.54 cents per share however the actual results were 20% less standing at -0.65 cents per share. Despite missing earnings this stock continued its run up. What this leads me to believe is that the market was already expecting etrade to do badly this quarter and instead continued its upward run along with the market and other financial stocks riding on the upward momentum. It also leads me to believe that people are just trading the already pre-established range of this stock taking it from the low of the range towards the high and back. If it came down to fundamentals then this stock is not reacting as it should for a company that just posted a net quarterly loss that was bigger than expected which leads me to conclude that this stock is trading purely on technicals. Let us examine those.

Technicals

I figure the best way to illustrate the technicals of this stock is with a chart.

ETFC chart

First lets look at the RSI. Sitting at 79.97 clearly this stock is overbought. While being overbought shouldn’t be your only reason for initiating a short position since markets can stay irrational a lot longer than you can stay liquid we should only use this to know how high the stock is priced relatively to recent prices.

Given that this stock has been on a strong uptrend lately the second indicator we probably want to look at is the MACD which gives accurate signals about changes in momentum on trending stocks. The MACD is showing us slowing of upward momentum with a bearish cross about to occur if prices don’t start moving up quickly. I would wait for a cross before initiating a short position.

The slow stochastic indicator is showing us that the price action is overdone and that price will probably correct itself soon enough. Notice how every time this indicator has been above 80 the stock soon corrected itself.

Finally if we look at an even longer term chart we see that there is a critical resistance level sitting right at $11 a share. With the technicals as they are I really doubt we’ll break through it.

These are the reasons why I am shorting my own broker and have a price target of $9.50 to close out my short position.

Give your thoughts below.

Posted Tuesday, February 5th, 2013 under Specific stocks.

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