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  • A Technical Trading Rally In Financials May Be Brewing 0 comments
    Apr 9, 2009 9:29 AM | about stocks: SKF, VXX

    There's that old adage that when short-term trading momentum overcomes long-term trading momentum in a security's pricing, traders take notice.  There are various ways to measure when, precisely, such an event occurs, but a common approach is to look at a fifty day and two hundred day exponential moving average of the security’s price (hereafter, the “EMA”).  If, for instance, the fifty day EMA drops below the two hundred day EMA, the momentum of the security’s price can be interpreted as negative, meaning, in layman's terms, that sucker is poised to drop like a stone.  Many traders react accordingly, in a manner comparable to, say, a hungry lion in the midst of sick, young, or aging herbivors (true - everyone thinks lions mostly loll around waiting for a pride of lionesses to do the hunting, but when lions DO actually hunt, holy cow, it's something terrible to see).

    With that bit of zoological background in mind, it’s illustrative to look at one particular exchange traded fund – Ultrashort Financials ProShares (NYSEARCA:SKF). After bumping up to $262 a share back in November of last year, and then hitting a lower high at $250 a share in early March of this year, SKF now trades at about $88 a share. SKF has, in other words, established a pattern of lower highs and lower lows – which when you get right down to it is more or less what a bear market is all about. And, not coincidentally, the fifty day EMA has now crossed below the 200 day EMA.  You might say the price of SKF is ripe to fall off a cliff. As I write this article, Wells Fargo (NYSE:WFC) has posted a shocking $3 billion profit. SKF is falling in pre-market trading like, well, a sick and aging herbivor.

    This all comes as good news for those who’d like to see some recovery in the stock price of financial firms, because when SKF rallies, the composite price of financial stocks tends to sink. Considerably. The converse pattern is likely to hold true going forward, and so, if the imminent demise of SKF proves true, it is likely the price of many banking and financial firms should, on the whole, improve significantly from here.

    There’s a few other hopeful signs, including what happened yesterday with the CBOE Volatility Index (hereafter, the “VIX”, and which can be traded using Ipath exchange traded notes such as VXX).  The VIX measures volatility on the equities markets, and, since stock prices tend to fall more rapidly they gain, a high level on the VIX often accompanies or presages falling equities markets, whereas a lower level on the VIX tends to accompany rising equities markets.  After hitting an all time high of about 80 back in October of last year, and then bumping up again to about 80 in late November of last year, the VIX failed to set a higher high.  It has since dropped to around the 40 level, where it has been bumping around for most of this year.  In the latter part of March, the VIX observed its fifty day EMA twice as trading resistance, and failed to observe support at its 200 day EMA, establishing a pattern of growing price resistance, and failing price support.  It seemed like there was strong support for the VIX at 40. Until yesterday. That old VIX broke through this support level and dropped to 38.85.  The case for a lower level on the VIX going forward just gets stronger and stronger, at least from a technical trading perspective.

    If we do in fact see the VIX fall, that would potentially bode well for equities markets in general, and for the equity of financial firms more specifically.  I say that because it’s plenty hard to make a case that bank stocks could rally if the rest of the market isn’t following along. So, I'm going to posit that any bullish development for the equities markets in general at least removes one barricade against rising stock prices for banks.  

    To sum up, it wouldn’t make sense to start buying up bank shares on the basis of these technical theories alone, but any technical signs of a turnaround in share prices for banks and other financial industry players represents one of the few bright lights in what at times appears to be sea of utter darkness in the capital markets. But here on the Savanna, we know that at the end of every famine, there comes a feast. We may not see them yet, but have no doubt that the lions are watching with keen and unsympathetic eyes... making woofing sounds... ropes of glistening saliva forming at the corners of their mouths.....  

     

    By Alex Trias

     

    Disclosures: The author owns shares of several banks including Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM) and Citigroup (NYSE:C).

    Stocks: SKF, VXX
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