Far From a Bottom in Financials

While it may be a bit too early to call at the moment, I am going to go out on a limb and say that the current bloodbath in the financials is far from over. Here's why:

First of all, just look at the indexes. Technically, every single one is now firmly in a down-trend. So why bother fighting that? For every new high that was was made last week, there were 9 new lows made. The point is that most stocks tend to follow the direction of its underlying index. Thus, it can be said with some certainty that the financials will continue lower, especially since they are at the pinnacle billion-dollar credit crisis.

Secondly, just look at the actions of the Fed. Do you think they are cutting interest rates by 75 basis points because the economy is growing exponentially? No. They are frantically cutting rates because they have been behind the curve. Sure, in the long run, these rate cuts will benefit the financials hugely, but here and now, the economy IS slowing. Consumer spending has been flat three of the past four months and I would not be surprised to see this continue into the year. Look for the U.S. GDP numbers to follow suit, as they will be the confirming factor.

Finally, let's look at the charts: the XLF traded as low as $24.11 and closed at $26.05 on Jan. 22, 2008. Currently, the XLF is sitting at $25.30 and trending lower after hitting resistance at its 50-day moving average. If it breaks through $24.11 on heavy volume, watch out below, because such a selloff will be ruthless, putting many long positions deep in the red. The market is a bit oversold currently and I am looking for something of a rally this week so I can start building a short position in the XLF with a tight stop loss to prevent any dead-cat bounce from doing me in. Simply put, the current damage simply cannot be undone overnight and I think it may be foolish to think otherwise.

Disclosure: none

Comments

[fxtrader07]

in short you say: the trend is down and will continue so because it has been down for months.
you are missing three important points.
1) financials are down here as much because of huge writedowns, expectations of more writedowns and worries about future earnings given the deflating credit bubble and the slowing economy. Future earnings are to worry about as they will be lower than during the bubble years 2004-2006. But apart from that, while a lot of bad news that is baked in that has already materialized - a lot more has not, and in fact may never do! writedowns related to gaap accounting are just that: writedowns in a book. unless the stuff is liquidated at the write down price there is every chance it may be written down further - or it may be written up again! Given the fact that the creditmarkets are trading (well, they are not trading - they are paralysed, dysfunctional, illiquid) err pricing in default rates 5-6 times as high as they are in reality there is a very good chance that a substantial poart of the writedowns will get reversed in later quarteres, leading to positive earning surprises
2) the economy is in a bad shape and will not improve dramatically anytime soon, but, it will not crash either. the fed cuts rates at break-neck speed and the govt just borrows on behalf of the individual consumer and drops the money from ben's proverbial helicopters. More of that "cure" will be announced come November, rest assured. part of this money will be saved and will be channeled into the financial system one way or the other - helping banks ultimately.
3) more money from other countries will flow in taking advantage of the dollar#s plunge. many u.s. assets will be transferred abroad. that#s the price this country pays for living on boprrowing from the rest of the world for far too long. all those dollars will come home one day and buy up everything - no, not everything. not coke bottles. rather, the coca cola company itself. and they won't open an account with citi - they will buy citi. In any case, that puts a floor under the banks and it recapitalizes them.

Chances are that the worst is over for the stocks - even while it takes a few months or even years more till all is sorted out.
The trend is mature in the financials and while i do not believe they will be great investments over the coming 12-24 months i am pretty sure they will be even less great shorts. probably dead money for some time for both bulls and bears. pretty much as the homebuilders here. if at all, some regional banks will go belly up due to large loan losses and writedowns of collateral on home loans but then, you have to find those that will go bk. because the others may not have much downside left from here

[Ming]

dear FX trader. Addressing your points

a. write backs of written down loans is possible, but not when housing market is worsening badly. Not all the news has been reflected in the figures. Hence the downtrend in stocks will continue.

b. consumers are in very bad shape. The Nov cure is too far off to contemplate. So, stocks will continue falling.

c. Flow of foreign funds into the USA will come when matters have stabalised. Not whilst things are crashing. So, stocks will continue falling.


The technicals are very oversold. The recovery will be fierce. As always cover your shorts quickly.

Best of luck.