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Financial Sector’s Relative Strength Saves Market at 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?

bank index bkx august 2007

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One Response to “Financial Sector’s Relative Strength Saves Market”  

  1. 1 Dave

    Babak and others, this week’s Panic/Euphoria is at neutral (currently at -0.22, up from -0.23 last week). Flows to institutional funds were $6 billion. If you are a contrarian, these aren’t very good signs. People are probably kidding themselves if they think this is over, especially given current ISE numbers and the above numbers, IMHO

    Babak, what are the other sentiment indicators reading?

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