“Hello, I’d like to order a rally please. Yes, the financials. Good. Can you get that here in less than 45 minutes? ok. And you take plastic right? Ahh, okay. Thanks Bye.”
The financial sector - I use the Financials Select Sector SPDR (XLF) as a proxy - has been a horrible spot in the market lately. Ever since it fell out of bed in late February this year, it has shown one of the weakest relative strengths of any sector. While the market powered ahead in April and May to reach new highs, the best the financials could do was reach their previous highs again and fall down once more.
It has been ugly. But are we anywhere close to putting this sorry mess behind us?
Looking at the bullish percent chart for the sector, I noticed that it has a relatively low 63%. That may not seem low but keep in mind that since the bull market, this sector has tended to bottom around 55%-60%. The market correction in March 2007 only took the BP% down to 65%. Maybe that’s why it didn’t rally as much.
In any case, although the bullish percent is relatively low, it still isn’t low enough to merit a rally here. Take a look at the graph and you’ll see what I mean:
The internals of the sector don’t look that appetizing either. Taking a look at the number of stocks within the sector trading above their moving averages shows: around 50% above their 200 day MA, 20% above their 50 day MA and only 10% above 10 day MA.
When we’ve seen such a short term oversold situation in the sector, it has resulted in atleast a bounce. But not until we see less stocks above their long term MA are we going to set up for a meaningful rally. Today we bounced 1.5% but I don’t think we’re in the clear yet.
The bright spot is that short interest in the S&P Financials Select Sector SPDR (XLF) is at a multi-year high. The last time it was at this level was April 2005. From a sentiment point of view this is positive and it also means that all those short sellers are providing quite a bid under the price.
To conclude, I don’t think we’re seeing any sort of capitulation here. The worst is if we just drip lower. And I’m afraid the technical picture looks like we might just do that some more. If that is the case, it doesn’t bode well for the market in general either.
Here are the top 10 components (by capitalization):
Citigroup Inc. (C)
Bank of America Corp. (BAC)
American International Group Inc. (AIG)
JPMorgan Chase & Co. (JPM)
Wells Fargo & Co. (WFC)
Wachovia Corp. (WB)
MORGAN STANLEY (MS)
Goldman Sachs Group Inc. (GS)
Merrill Lynch & Co. Inc. (MER)
American Express Co. (AXP)
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