How Do You Spell a Short-Term Bottom in Financials?

Includes: RKH, XLF
by: Kevin Cook

On Tuesday, I was watching the volume in the financial sector ETF (NYSEARCA:XLF) because we had just hit a new all-time low at $16.77 and we were on the way to exceeding the all-time record volume above 300 million shares hit just the Friday before.

Why was I watching the volume so closely? Because I'm a sucker for capitulation-type panic selling that usually marks bottoms. No, it's not the perfect indicator. But, I've seen it happen so many times in my ten years of trading that I can't argue with it's reliability on an index that I know isn't going to zero and is down 50% in the past year.

My radar was also on the S&P 500 SPDR ETF (NYSEARCA:SPY) cracking 500 million shares. We got both Tuesday, and then some. The XLF hit 469 million shares and the Regional Bank HOLDRS ETF (NYSEARCA:RKH) also blew through all previous volume records in its 8-year history by notching 5.37 million. And the RKH mimicked the XLF on all-time record lows too, plunging to a spike low of $72.55.

I had the capitulation-type volume on panic selling I was looking for Tuesday, so all I needed was a positive catalyst to light the fuse. Thank you Wells Fargo (NYSE:WFC)! Do you think my comments about the possibility of them cutting their dividend like other regional banks Tuesday made them mad and they wanted to crush me like an ant? No, but they could and did crush any short sellers left in the best financial names. Cox helped too with the "we're going to enforce the law on shorting" talk.

Where do we go from here? Higher, for a while. How high? Well, by my calculations, we are due to head back up to at least 1,325 on the S&P 500. That is the sight of the 200-week moving average. And just below 1,350 are the 50 and 100 day moving averages. We have to get back near those levels. Why? The market created a vacuum on it's steady grind lower to 1,200. Or maybe a rubber-band is a better analogy. In either case, we are due to snap back because we are so far away from those key averages. That's my definition of "oversold."

Dear Bulls: No, we won't exceed 1,350 on the S&P. Those levels will be heavy resistance for some time, especially since the 50 and 100 week moving averages just crossed bearish just above 1,400. I talked about that story in my "Sell in May and Go Away?" piece at on May 16th. In short, we are due to enter a classic bear rally. So, damn the recession and inflation and that awful mutant, stagflation. Let's hope this rally is a doozy!

More likely is that we will drift higher, with occassional bursts of renewed optimism. This market has got to be tired. And financial companies aren't done revealing to us the excesses of the housing and mortgage bubbles.