Tuesday, May 20, 2008

Tough to Bank on the Financial Stocks

As we can see from the top chart, financial stocks within the S&P 500 large cap universe (XLF; red line) have diverged noticeably from the broader market as a whole (SPY; blue line). Indeed, even as we've seen multi-month highs in SPY, financial shares have been making multi-week lows.

The advance-decline line specific to financial stocks (bottom chart), as tracked by Decision Point, is nearing its bear market lows. Only 33% of all stocks within XLF are trading above their 20-day moving average. By contrast, 62% of all NYSE stocks are above that benchmark.

The dramatic underperformance of financial shares suggests that, even as there are signs of easing with respect to the credit crisis, the profit outlook for banks is not favorable in the wake of deleveraging. Amidst indications that bank deleveraging around the world has only just begun and that, in the words of Fed Vice President William Dudley:
"It will take time for market function to return to normal.
The reintermediation and deleveraging process has, in my view,
a considerable ways to go,"
it may be a while before investors can bank on a bull market in financial shares.