Markets Are at a Crossroads 17 comments
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The financials seem to have been rather dull of late. Stories regarding TARP paybacks have produced nothing more than a yawn in the stock market. Since the start of May, the Financials Select Sector SPDR (XLF) has been stuck on the range, wobbling somewhere between $13 and $11 bucks a share. Ho hum.
It shouldn't surprise us. XLF has bounded up over 100% since hitting an historic low of $6 a share in March. After a run like that, who wouldn't expect a pause, or even more likely, a retracement, in the price of this ETF? And there are fundamental reasons galore in support of falling prices in bank shares. Where to begin? Eager optimism about bank earnings for starters, which set up the stage for wailing and gnashing of teeth come earnings season. A continuing recession that limits demand, borrowing and sours existing loans. The prospect of further write-downs, the prospect of a massive bank insolvency. The list goes on.
But there is more going on here than meets the eye, because while XLF has tarried and meandered around, significant overhead resistance has been approaching ever closer all the while. By this I refer to the two hundred day exponential moving average (the "EMA"), which has dropped, steadily, down to…. you got it. About $12.45 – which corresponds roughly to where XLF is trading as of the time of this post. From a trader’s perspective, XLF is looking anything but dull at the moment, because when an asset hits a stiff technical trading resistance point, one of two things will happen.
First, the asset will resume its dominant price trend, which in the case of XLF over the last two years has been, to put it mildly, down. And generally, in the context of a bear market, the reversion to the dominant trend can be violent.
Or the opposite can happen. The asset price can breach resistance, maybe sniff around a bit to see whether resistance is, in fact, support, and if that’s the case, then the path of least resistance for that asset price is up. After a two year bear market, if XLF observed the 200 day moving average as support, rather than resistance, that would likely signal that XLF has entered a primary upward price trend. Traders would take note, because after dropping nearly 82% over the course of this bear market, XLF would, potentially, have considerable upside were it to enter a new primary upward trend.
What’s the most likely outcome at this point? Technically, it appears more likely that XLF will enter a new primary upward trend at the moment. After sporting a steep run up from the March lows, XLF has formed a “wedge” pattern, with increasing higher lows and modestly higher highs. The share price for XLF has soared in the past few months, and from May to now, pressure has continued to mount from the bottom up, which indicates a higher probability that the price of this asset will, ultimately break through resistance. In April, short term trading momentum (measured by the 50 day EMA) for ProShares Ultrashort Financials (SKF) dropped below (or, put another way, overwhelmed) long term investment momentum for SKF. This is a technical indication of a shift in the primary price trend for SKF. And true to form, the price of SKF has continued to grind lower, setting a clear bearish pattern of lower highs and lower lows. And what’s bad for SKF is very good for XLF.
Unfortunately, technical analysis tends to be more descriptive than predictive, but at the moment, the trading signs favor a continuing rally for XLF. But those signs can and do change as new facts hit the ground. There is no way to predict future events – like a massive bank insolvency, a giant tsunami hitting Wall Street, killer asteroids. And the only guarantee this author is aware of is the simple fact that the unpredictable is guaranteed to happen at some point. But on the fundamental side of things, at the moment, banks can borrow money virtually for free from the Federal Reserve, and lend it out at increasingly higher rates. The yield curve is as steep as Mount Everest, which indicates banks are enjoying a massive margin on their new loans. With some liquidity restored to the mortgage backed marketplace and some favorable new accounting rules, we could see write ups of some assets as well, lifting bank earnings further.
The largest wild card, in this author's view, is what might happen to the broader markets. At least in the US markets, most equities indexes are still poised at or slightly above technical trading resistance, and it is plenty difficult to judge whether or not they are likely to overcome these barriers or not. If not, and if a sickening sell-off should occur on the broader equities indexes, XLF will most likely have to join into that misery as well.
The take away from all this is really just that there is more going on with the financials than at first meets the eye, and upon closer examination, it seems that we are at a very critical, make or break, kind of juncture. Those of us who are long in the financials should keep our fingers poised on the sell button. And those of us who are short should be wracked with terror.
Disclosures: The author owns some shares in XLF
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This article has 17 comments:
There can't be any manipulation! Can there?
Why is it almost everyday now like clock work, with 5 minutes to go the market just goes nuts?
"Favourable new accounting rules".
Oh! You mean like 'mark-to-make-believe? Or does this mean you get to 'put' the decimal point where it looks the greatest?
The level of financial 'creativity' never ceases to astound me!
If not for the sad state of affairs, its good entertainment!
On Jun 10 01:06 PM Donald Ingram wrote:
> "More going on with the financials than at first meets the eye"!
>
> There can't be any manipulation! Can there?
> Why is it almost everyday now like clock work, with 5 minutes to
> go the market just goes nuts?
> "Favourable new accounting rules".
> Oh! You mean like 'mark-to-make-believe? Or does this mean you get
> to 'put' the decimal point where it looks the greatest?
> The level of financial 'creativity' never ceases to astound me!<br/>If
> not for the sad state of affairs, its good entertainment!
On Jun 10 12:18 PM j_remington wrote:
> A few more days or weeks and the picture will be clear
Nobody said markets are fair or rational. The object of this game is to figure out what the rules are, what the players are doing, and either go along for the ride or get the heck out of the way.
On Jun 10 02:09 PM Alex Trias wrote:
> And as to your view that perhaps, maybe, just maybe, there might
> be a little manipulation going on, look at the volume. A few moments
> before closing time, WHAM, volume spikes up hard, and in a thinly
> traded market like this one, that can send prices reeling or soaring.
> Simply put, we are in a traders market right now. That's what makes
> it so interesting to focus on technical trading stuff, and why it
> has been so descriptive of late. My own hunch (and it is just that
> - a hunch), is that the US government now basically has the financial
> industry in the palm of its hand. And elected official types really
> really like bull markets. Draw your own conclusions about what a
> trading desk at Citibank might be up to when Treasury is the largest
> (and controling) shareholder.
> Nobody said markets are fair or rational. The object of this game
> is to figure out what the rules are, what the players are doing,
> and either go along for the ride or get the heck out of the way.
I like SKF because I hate the banks, I've lost some mony but when the financials feel pain I feel so much better...
market psychology is important too - look at the reality of the 10 year bond at 3.93% and 30 year mortages at 5.5+% and it doesen't seem unreasonable to expect investors to come to their senses and start taking massive profits on XLF components.
don't mind me, I don't know squat,
I just have a bad feeling about this bear market rally,
BDO
On Jun 10 02:48 PM thiazole wrote:
> Or it could just be that people who are convinced a big crash is
> coming any day now are shorting in the morning and covering in the
> afternoon when they realize that today isn't "the day". I find the
> simplest explanation is usually the most reasonable.
I think that this joy and euphoria will quickly dissipate in the near future when we see the toll that high gas and high mortgage rates are taking on the fragile consumer. It's just a matter of how long it takes to start showing in some key reports. Then this massive game of musical chairs comes to a screeching halt. Don't get caught chairless.
As mentioned by others, you have to fight the Fed and the TARP banks. They are the ones with the billions/trillions of liquididty, the trading operations, the motive (remember banks reported most of their Q1 profits were from trading...and obviously they are still losing big on mortgages,etc.), and apparently they have the winking approval of the Fed and Treasury. It is in their perceived interest to see markets higher and with the trading volumes the TARP banks can generate, and combined with the relatively low volumes on the markets.... it is just not that hard for them to support and manipulate the markets higher at this stage.
At some point they won't be able to do it anymore, but who knows when that is. Some of the factors they can't control as well are interest rates and bond yields. As the 10 year Treasury goes over 4% (coming soon), then there will be increasing pressure on stocks as sellers will emerge, take profits, and move to Treasuries. Also as rates rise there will be more support for the US dollar and that will force commodities like oil down. In addition, the rise in interest rates and higher commodity prices will begin to weigh heavily on the so-called recovery and probably very negatively impact housing, consumer spending, etc. When stock prices start to fall, then consumer sentiment probably will start to turn more negative again and the next downleg could well emerge and start to accelerate. There is very little fundamental support for stock prices at the level they are at now, so fundamentals will also start to weigh on the bear market rally and also have a big impact on any sell-off
In short when the uptrend is broken, then selling pressure could well overwhelm the artifical support and if massive new shorts emerge, which is a strong possibility, then it could rapidly turn in a serious new downleg.
Is that gonna happen? In my view that is a lot stronger probabliity than much more continuation of the bear market rally.
On Jun 10 06:17 PM Tomcat101 wrote:
> I thought the treasury auction's poor results today would have caused
> more excitement than it did. SP went down a whopping 1% or so and
> then gained most of it back by the end of the day. No big deal. What's
> it gonna take to scare these people? I'm starting to think that Russia
> could invade Alaska, oil go to $600 a barrel, Obama drop dead of
> a heart attack, and an asteroid hits Washington D.C. and this market
> would continue to rally.
>
> I think that this joy and euphoria will quickly dissipate in the
> near future when we see the toll that high gas and high mortgage
> rates are taking on the fragile consumer. It's just a matter of how
> long it takes to start showing in some key reports. Then this massive
> game of musical chairs comes to a screeching halt. Don't get caught
> chairless.
On Jun 10 04:48 PM Alex Trias wrote:
> Yeah, I like that. I have to wonder whether the little pop at the
> close we see each day is attributable to simple short covering. I
> sure wouldn't want to go to bed with a short position open on anything
> at the moment. The curious thing, though, is that massive volume
> swell at the close - usually within the last minute or two of trading.
> Is that the stuff of short covering, or is it more consistent with
> "banging the close"? We saw oodles of "bang the close" behavior during
> the most volatile sessions of this bear market - so I've got to give
> some real consideration to whether we're seeing the same thing now
> - only on the upside.
I have taken the opposite side of the trade with SKF. I stuck my neck way out today on Real Money at TheStreet.com today with the headline midday article ("This Rally Looks Tired") and called for a 10% pullback, at a minimum, and possibly a 50% give back of the gains from the March 9 lows this summer.
I question my judgement in doing this on the home turf of the cheerleader-in-chief, Jim Cramer. If I am wrong, does anyone like mince meat?
There is no way we see a 50% pullback any time soon. That would put us significantly lower than the March bottom which was created in a panic that suggested the entire banking system might collapse. Even if everything fell apart, it would still take months to happen.
On Jun 11 06:25 PM John Lounsbury wrote:
> Alex - - -
>
> I have taken the opposite side of the trade with SKF. I stuck my
> neck way out today on Real Money at TheStreet.com today with the
> headline midday article ("This Rally Looks Tired") and called for
> a 10% pullback, at a minimum, and possibly a 50% give back of the
> gains from the March 9 lows this summer.
>
> I question my judgement in doing this on the home turf of the cheerleader-in-chief,
> Jim Cramer. If I am wrong, does anyone like mince meat?