Week in Review: Financials in Downtrend

U.S. stock indexes rose in the second quarter of 2007, with the Dow Jones Industrial Index (+8.5%) putting in the best performance since 2003, the S&P 500 Index (+5.8%) having its best quarterly advance since the fourth quarter of last year and the Nasdaq (7.5%) its best since the fourth quarter of 2004.

Despite a roller coaster at the stock market last week, in which the FED decided to hold interest rates steady, the Nasdaq finished the week with a small gain of 0.6% followed by the the Dow with 0.4%, and the S&P 500 with 0.03%. The Russell 2000 posted even a small loss of -0.2%. However, the wild ups and downs in the VIX last week indicate that the market participants are still nervous.

This week’s top performing sectors on a relative basis were last weeks poorest performing sector Utilities and Health Care with a gain of 1.56% and 1.37% respectively. The poor sector performers were Materials with a loss of 1.45% and Energy with a decline of 1.32%.

The chart of the normalized ratio of the Financials SPDR (XLF) reveals that the Financial Sector is in a downtrend since January and the Materials Sector (XLB) is still trying to break out above its relative highs in the first quarter of the year. The shaded areas represent two standard deviations above and below the SPDR’s 50-day moving average.

Comments

[wixeywaxy:]

What constitutes the finacial sector, Wall St. Inv. Banks, Commercial Banks, Brokers, Insurance Companies? All of the above? Are the risk in the economy common to all of these in the same way? Does the Fed Res work primarily to protect the banking system as it was created to do, or does it work to protect the dollar in opposition to irresponsible government spending? I don't think these are entirely compatable. If it's the latter, then can we assume that the current government reckless spending in a low tax environment is inevitably bad for the banking system, but I don't see the relationship to the other participants who it seems to me are better able to cope with narrower credit spreads. Perhaps other people will comment, giving me some enlightenment. Vic

2007 Jul 02 10:36 AM

[Oliver Schw...:]

The XLF SPDR includes a wide array of diversified financial service firms with business lines ranging from investment management to commercial and investment banking and also insurance companies. Among the companies included in the SPDR are Citigroup, Bank of America, American International Group, Goldman Sachs, Fannie Mae. You can find a detailed list here.
In my opinion the resent sell off is mainly due to the current problems in the mortgage sector, especially the mortgage backed securities (for example see the near collapse of the Bear Stearn's hedge fund due to mortgage losses). I think market participants are currently demanding a higher risk premium for financial stocks because of the uncertainties in regard to a possible "mortgage implosion" and it's effect on the financial sector.

2007 Jul 02 04:31 PM