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The Financial Sector Bounces Back at Trader’s Narrative

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Last Monday I gave the heads up on the financial sector because its bullish percent index was at an extreme low. In the following days both the sector and the bullish percent index continued to fall.

In fact, the financial sector bullish percent index fell to below 26. A level which it had only seen in the deepest, darkest days of the bear market in late 2002.

As you can imagine, there was a lot of fear and loathing in the air. A lot of uncertainty. Talk of a big bank going under, the sub-prime mortgage mess spreading, etc. But the best time to buy is when everyone is scared witless. That is when you find real bargains.

Unless it is the end of the world, in which case you’ll have bigger things to worry about.

It wasn’t just the bullish percent, by the way, that was signalling the extreme situation in the financial sector. The percentage of stocks above their 200 day moving average fell to 10%. Again, something that had only happened in the final days of the bear market.

Things have bounced back from the brink but we’re still very oversold. Right now only 12.5% stocks closed above their 50 day moving average. I expect this sector to continue to slowly claw its way back. If you haven’t gotten in, there’s still time to buy great banks, brokerages and insurance companies at firesale prices.

financial sector bullish percent august 2007

Although I use the bullish percent index a bit differently, the traditional interpretation has been satisfied: when the index falls below 30 and rises above it, a bull or buy signal is given according to point and figure charting.

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