Trader’s Narrative

By the grace of hindsight, the riddle of their weak relative strength is crystal clear. The market was telegraphing the coming correction and the crisis in the sub-prime mortgage sector.

But just as this sector signalled weakness in early summer, yesterday and today I noticed the opposite. While the general market broke down below its previous lows, the financial sector didn’t. It grudgingly inched lower but held its ground for the most part. And today, it rallied to close up almost 5%.

This is after all, the sector that wears an albatross around its neck. The guilty party that caused us all this grief. Why would it be showing strength? especially as all around it shares were being getting pummeled?

I suspect the message of the market this time is that the worst is over. Giant, well diversified financial institutions like Goldman Sachs (GS) and Citigroup (C) are not going to fold over this. They’ve weathered storms before and they will weather this one.

Take a look at the Phili Banking Index (BKX). Hmmm… is that a double bottom?