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Time To Consider The Battered Financial Sector at Trader’s Narrative

Looking over the bullish percent indices for different sectors and markets, I noticed that the lowest reading is from the financial sector. Check out my previous post for more information on how I use bullish percent indices to time the market.

The riddle of the financial sector seems to have been solved! What it was trying to tell us apparently is that the market didn’t have the leadership needed to sustain its new highs.

But the hammering it has gotten lately has put the sector at the threshold of giving us a bullish percent buy signal. As the chart shows (below), the bullish percent index fell last week to 30. The financials haven’t seen such a low reading since the 2002 bear market bottom!

I’d prefer a reading in the 20’s but even at this point, we are arguably in the “buy” zone. Looking at the Bank Index (BKX) we see that it could fall to support in the low 100’s range. The next line in the sand would be 95 which would surely put the bullish percent index into the low 20’s.

The question is, is the nature of the market changing? If it is, then we could go lower as a new bear market takes hold. If this is yet another correction within an ongoing secular bull market, then we are close to an inflection point for the financials.

Of course, if the Fed wakes up and cuts the interest rate as the bond market has been screaming at it to, then this sector would rocket higher.

I’d suggest even without that, the financial sector presents a compelling case here. Take a look at the usual suspects: Citigroup (C), Goldman Sachs (GS), etc.

financial sector bullish percent july 2007.png

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