Have the Financials Found Their Bottom?

Halfway through Wednesday’s session, my screen is once again filled with red. The indices look as if they are poised to take a run at yesterday’s lows.

From a sector perspective, the picture is considerably muddier, as two recent laggards, financials (XLF) and consumer discretionary (XLY), are clinging to positive territory as I type this. As I see it, one or the other of these sectors will have to continue to deteriorate if the markets are going to continue lower from current levels.

Given that the financials are already down 53% from their May 2007 highs (see chart below), it is important to keep in mind that the easy money has already been made on the short side. A wide variety of financial sub-sectors (mortgage companies, bond insurers, money center banks, regional banks, investment banks/brokers, etc.) have already made multiple trips to the woodshed – and while some individual issues may still be quite vulnerable going forward, there is a limit to the amount of blood that can be squeezed from a broad-based ETF or index.

Going forward, I suspect the risk/return profile of the financial sector may actually favor the bulls. If the next couple of broad market moves down fail to pull the financials with them, the path of least resistance for the likes of XLF may indeed be up. Keep an eye on this development, because if (and admittedly this is a very large “if”) the financials are done falling, then the markets are likely to be ready to put in a bottom too.

Comments

[StupidityAn...:]

The vast majority of idiots still think this is a typical economic downturn. They simply don't recognize that, over time, the US stock market has evolved into nothing more than a massive pyramid scheme which is now in the process of collapsing. Enjoy the ride fools.

2008 Jul 02 06:28 PM

[StupidityAn...:]

Ps You suckers did it to yourselves when you let your government dupe you into thinking you could fight a loosing war, run up a massive deficit and not pay a price.

2008 Jul 02 06:31 PM

[Mike Stathis:]

Ditto Spada.

2008 Jul 02 07:19 PM

[Jim Hawthorne:]

Stocks, industries and sectors do not bottom simply because they have taken great falls from previous highs. We begin the process of bottoming when there are quantitative fundamental improvements giving hope for future gains.

2008 Jul 02 09:57 PM

[DaveBrit:]

Its never JUST fundamentals or technicals, always both. There are humans involved, hence psychology is important. Bearishness is very high for the financials now, pessimism everywhere (see above for an example, sky is falling stuff); to me that's a sign we might turn. I like the exchanges, no credit risk and lots of volume still, but dragged down with the XLF. Just MHO.

2008 Jul 02 11:46 PM

[1worldcurrency:]

No, it's always fundamentals in the end. Quit looking at the charts and look at the balance sheets. Tier 2 and 3 assets are a black box and defaults are rising in EVERY loan category not just subprime. Hurricane Ponzi will blow the bottom-fishing dividend-yield-chasing chart reading voodoo investors into oblivion. I just hope they take bonus baby bankers with them.

2008 Jul 03 12:30 AM

[Fighting Yoda:]

Long way down. We are in long drawn cyclical bear market.

Credit unwind and world wide inflation- leading to stagflation, ultimately depression.

Be very very defensive.

2008 Jul 03 04:11 AM

[Fabien Hug:]

Effectively, where are the fundamentals? Many years of credit expansion are at an end and losses are piling up (see report somewhere in this blog about car loans). Short term rebounds are always possible but there is not much value in this sector right now.

2008 Jul 03 11:03 AM