Monday, November 17, 2008

The Vote of No Confidence Among Financial Stocks

To date, government efforts have focused on stabilizing the financial sector, including banks and insurance companies. From the above charts, it seems safe to say that the stocks of these financial firms have not responded favorably to these rescue efforts. The financial stocks within the S&P 500 universe (XLF) has lost 2/3 of its value and are hovering at bear market lows (top chart). As the helpful chart from Decision Point illustrates (bottom chart), the advance-decline line specific to financial issues within XLF is steadily moving to bear market lows. We're also seeing unusually negative money flows from the XLF stocks.

It is difficult to imagine sustaining a bull move in stocks overall without seeing some signs of investor confidence in this key sector. At this point, XLF may be serving in part as a sentiment gauge regarding investor confidence in the government's rescue efforts. Thus far, the verdict is thumbs down.


Johan Lindén said...

Well, banks has actually, till recent, been outperforming the market a great deal, and still the market has fallen continuously.

So that reasoning isn't quite right.

Ryan Barnes said...

Hi Brett,

I agree that the XLF is acting as a barometer for the broader markets; it is as it should be, as the sector's ability to finance the rest of the economy remains in doubt. I especially like to look at Goldman Sachs as a barometer for "tail risks" in the sector; as GS falls, the barometer reads higher levels of tail risk fear...Enjoy your writing and analysis. RB