Watch XLF for Signs the Bear Will Continue

As I've suggested numerous times in previous articles on Seeking Alpha, I don't recommend short selling in an environment where MZM is rising. Given that equities have come crashing down this week and the recently reported MZM for the last week of July was slightly down, I thought there may be some low-risk opportunities to enter short positions.

If we look back to the crash of 2008, we saw that the financial and banking sector saw the biggest drawdowns. This is understandable, given that the crisis was largely the result of overleveraged banks trading fraud-ridden derivatives (such as mortgage-backed securities). As the issue of fraudulent derivatives that cannot be accounted for is still on the balance sheet of banks and has not been directly dealt with in the least, this problem is still with us. For this reason, if there is another broad decline, I believe the banking and finance sector could lead the way (though ultimately I expect the Federal Reserve to utilize various "stimulus" programs to prevent asset prices from deflating).

And so it is worth noting that XLF, the most notable ETF tracking the financial sector, is at a critical support level. A close below this level next week paves the way for a move to around $11, a key price zone established in July of 2009. A breach of that level puts the March 2009 lows of under $6 per share in sight. If these moves happen, expect the rest of the market to follow suit -- at least until Bernanke introduces stimulus to target higher asset prices, as was the case with QE 2.




Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.