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Monday, January 14, 2008


the bottom in financials?

it's too early to tell, i think.

several major banks are reporting this week, and whisper numbers on 4q writedowns are astonishing, while sovereign wealth funds -- the hope of hopes -- gave the market a shank over the weekend.

i still maintain that the crisis is one of solvency, not liquidity, and that many smaller banks will be failing. moreover, a severe recession replete with corporate defaults is here and the fed is at an acute loss of truly effectively policy tools for this conundrum. avoiding the end of the debt supercycle will mean continuing flows of foreign capital into the united states in spite of a possible speculative collapse in the BRICs.

and yet, bank stocks have been driven down deeply -- and a plausible case for sufficient discounting can be made, in fact is being made by longtime bank critic doug kass on grounds of valuation and improving conditions. bennett sedacca is seeing isolated instances of risk compensation in the GSEs and MBIA. and the countrywide bailout is the sort of catharsis event that often marks turning points. and LIBOR is returning to something like normality in the aftermath.

i have to say that, on the charts, i don't entirely see it -- and i say that as a market long who thinks a fairly durable bottom could be going in at the recent lows. a bounce, yes. but the IYF financial component list was last week making new lows in cumulative points, cumulative volume, advance-decline -- not the sort of construction one would expect at a durable bottom.

participation -- against 30-day and 150-day moving averages -- is at 11% and 13% respectively. particularly against the 150-day, that represents a deeply oversold extreme -- and it's actually improved from august. i guess that's a positive divergence, but not much to hang the hat on. the washout last week also went to large percentages hitting new quarterly and annual lows -- 62% and 55%, respectively -- exceeding even august, a point from which the financials ran up about 12%, trough to peak, over the following couple of months. that sort of move is quite possible, in my opinion.

the example of the 44 KBW bank ETF components is more optimistic -- net points and on-balance volume have been constructive since the end of october even as the price of the index has slid along with the advance-decline line, both marking new lows last week. this would seem to indicate quiet accumulation in the largest of these banks for some time.

but a final low for the broader sector? color me skeptical. kass might have the price point about right, for all i know, but i would hesitate to be long even for a trade in the financials at this juncture. that will change when some construction in the IYF occurs, be it at this price level or a lower one. just not yet.

in the meantime, act on the plan!

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