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Financial Sector: Past, Present & Future Imperfect at Trader’s Narrative

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Back in May I wrote : Weak Financial Stocks May Not Hold Support Again which turned out to be right on the money.

A bit later in June I wrote that banks where broken:

…I suspect that by the time the Bank Index finds its way down to 65 or thereabouts, the bullish percent index will have commensurately fallen to significant buy areas…

The Philadelphia Banking Index (BKX) did indeed fall to 65 or thereabouts - if you interpret that liberally. In fact, the index broke 50 but when the global financial marketplace is melting before our eyes, why quibble over a few points? And the bullish percent did in fact spike to extreme oversold levels, reaching 5.62% in mid July.

These are the buy points that I’ve repeatedly mentioned and explained in how to use bullish percent to time the market. But to give you an idea of how rare this is, here is a long term chart:

bullish percent financial sector long term chart september 2008

Of course, what happened next is that the US government (along with a few others) decided to poke its finger in the crack of the dam and made it illegal to short sell financial stocks until October 2nd. The result of this blatant government meddling in financial markets was the two day rocket ride higher last week. To see this clearer, here is the same chart as above, zoomed in for the year to date:

bullish percent financial sector zoom september 2008

Aside from the fact that whenever you get the government involved in the market it throws all technical analysis out of whack, the important thing is that before the financial stocks rallied, they had only fallen to 30% in the bullish percent index. Based on this, I suspect that had the government not banned short selling and placed a temporary, artificial floor below them, the sector would have continued to fall dramatically.

Finally, the consequence is that having meddled, the sector is now at 80% bullish percent! Which makes me queasy to even contemplate taking any new long positions. If anything, this is the sort of thin air levels at which traders start looking around for shorts. But of course, now we can’t. This is a royal mess. We’ve gone from a situation which could be analyzed to one which is totally news driven.

Paulson’s Bailout
Here’s the problem that I and many others have with the proposed bailout plan:

  • the firms who are at fault face no consequences and do not give up anything
  • in fact, the firms are being rescued by ordinary taxpayers who wouldn’t know a CDO if it hit them in the face
  • Paulson has dictatorial power and authority for any decisions he makes
  • the management who ran their companies in the ground face no consequences
  • alternative plans were not presented nor considered
  • there are much much better alternative plans

Raise Your Voice
Democrats have begun to push back against the scheme and I doubt that it will go ahead as presented. You can find a lot more articles about what is going on with the bailout and keep up to date by checking:

I’m a Canadian so I can’t call up my representative in congress to give them an earful. But the vast majority of my readers are American so I urge you to educate yourself about what is happening. Once you realize the facts, you will understand why it is imperative that you raise your voice against the proposed bailout plan. This goes beyond partisan politics or the election. This is about the economic health of the US and the world. Do this for yourself and your children.

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