Monday, June 02, 2008

Weakness in Financial Stocks and Other Market Themes

* Banks Lead the Way - Well, with the heroic music cranked up, I proceeded to watch the themes play themselves out this AM, following the pattern noted in the earlier post. Falling yields/rising treasuries (flight to quality); weak NYSE TICK; rising Yen/US Dollar: it was a nice illustration of how intraday themes can combine with longer-term research to provide an edge. Among the more important themes, however, was the weakness in the banking sector. As the top chart indicates, the banking sector ($BKX) is testing bear market lows, and the six-month advance-decline line for S&P financial stocks (XLF; bottom chart) is doing the same. This continues the very mixed performance of sectors noted in my prior post.

* More on Mixed Sector Performance - Monday's performance left us with 648 stocks across the NYSE, ASE, and NASDAQ making fresh 20-day highs against 950 making 20-day lows. Clearly we're seeing some areas of relative strength in the market and other areas of distinctive weakness. Although we're near bull swing highs in the NASDAQ 100 Index ($NDX) and Russell 2000 Index ($RUT), the S&P 500 ($SPX) universe is much shakier. Among my basket of 40 stocks taken evenly from eight different sectors, we have 9 stocks qualifying as being in short-term uptrends; 10 neutral; and 21 in downtrends. Only 55% of $SPX stocks are trading above their 50-day moving averages, down from 80% at the market peak.

* Housing Rebound? Among the sectors hitting two-month lows on Monday were the housing stocks ($HGX). The index has been in a wide range since December, 2007; the resolution of that range will tell us quite a bit about not only housing, but the broader economy.

* Election Anticipation? Among two sectors likely to be impacted by the U.S. Presidential election, pharmaceutical stocks ($DRG) have been in the toilet, but defense issues ($DFX) have bounced nicely from their bear lows. Even if we were to withdraw from Iraq, there's a fair amount of military rebuilding that might need to get done, but drugs have to be a major focus of cost-cutting in health care.