Everything Financial Rolls Over: Is a Bounce Likely?

"I don't think the heavy stuff's coming down for a while!"
- Famous Last Words

Borrowing a great observation from Todd Harrison, unless financial stocks can catch and hold a bid, the market will continue to go down. Going into quarter's end, naturally, there isn't a fund in the world that wants to be shown holding blocks of the toxic banks, monolines, and their brethren. Hence, the kind of high-volume slaughter that's taking place across the board. What in particular?

• American Express (AXP) down 5% on 2.4x trailing three month average volume
• Bank of America (BAC) down 6.76% on 2.1x volume
• Capital One (COF) down 6% on 1.7x volume
• Citigroup (C) down 6.26% on 2x volume
• MBIA (MBI) down 10.6% on 3x volume
• Wells Fargo (WFC) down 5.24% on 1.8x volume

Even JP Morgan (JPM) and Goldman Sachs (GS) are getting hit hard – and weren't they supposed to be the big winners left standing in this financial shakeout? Additionally, Visa (V) and Mastercard (MA) – the card companies you always hear about as having no credit exposure (though I disagree with that statement) – are getting taken out to the woodshed along with pretty much every other financial name.

The other day, I said that there is going to be an enormous degree of uncertainty about the profitability of many of the larger financials for a multi-year period until they can find a model that works with reduced leverage. Accordingly, I'm limiting any potential purchases in that sector to companies where I've stress-tested the potential losses, and am comfortable with the results. So far, only American Express and Primus (PRS) have passed that test.

Is there an end to the selling? The only technical analysis system I've seen and have some chance of replicating is the one used by Tom Stone. But first a note of caution – I don't have all the data Tom does, and he might have additional indicators he uses that I'm not aware of. With that said, here are a few of the charts I've seen him use to gauge overbought/oversold conditions:

The first chart is the percentage of NYSE stocks above their 50 day moving average. Looking back, that number has needed to go below 20% to find a bottom – see January and March this year, and August 2007. We just hit 20% after the selling yesterday.

click to enlarge

Next is the bullish percentage of the S&P 500. This has tended to bottom under 35 recently; again, we're right there after yesterday.

Now to the TRIX on the S&P 500, or the triple-smoothed moving average. The market tends not to establish a bottom until the signal line (black) crosses the red line. We're not there yet.

The McClellan Summation Index has typically been under -500 before any chance of establishing firm ground has been in; right now it's at -450. This implies we're still not in the oversold territory where we've recently found bottoms.

The last piece of data I have is the CBOE equity put/call ratio; this moves inversely to the markets so it should be topping as the market is bottoming. The 30-day SMA is shown below, and it isn't looking like it substantiates a long argument.

The overall picture that's being painted is one where the market as a whole is starting to feel pain from all the down days, but not extreme enough (yet) as to suggest a turn is imminent. Given that there are a few more days for window dressing as well as selling to meet redemptions, and no real significant earnings releases until after the July 4th holiday, it's difficult to identify any catalyst to break the existing downtrend.

Disclosure: I own shares of Primus common stock (PRS) and am considering a purchase of the preferred notes [PRD]. I am also considering purchasing shares of AXP.

Comments

[squashnut]

Another seeking alpha misleading headline.

[jurrassic]

I think this article was very informative. For a turnaround we need a long tail candlestick on a daily chart..ie a typical washout down day with a recovery to at least even or up. Go back in time we never hit bottom without such a candle formation. Whoops... never say never in the market. A bounce today is a posssibility but the bottom is not in yet.

[blah-blah]

Totally misleading

[oldlures1]

I've never been much of a chart-follower, but it's food-for-thought. Thanks for providing.

[greencapitalist]

mastercard has been pummeled 15% for no reason. check out mastercard blog at matrader.blogspot.com