I last commented on the financials in July and at the time, the index was coming off the lows and looked like a breakout was developing. Since then, what we have seen is major underperformance and an index which is stuck in a range - one that has been in play for more than a year (except for the blip up in the spring). Today a well known bank analyst turned economist turned trader turned...I have no idea said the banks should be sold - or at least that is what she inferred. This gave the sellers a bit more ammo to short a few more shares heading into month end. In addition, I would not be surprised if the quant funds, those who love to play pair trades, are riding technology and short financials. The troubling aspect of this underperformance goes with the old adage, "So goes the financials, so goes the S&P 500). With the underperformance now showing up very clearly, does this mean that the S&P is in trouble?Well, if you were to take a more expanded look at the IYF off the March 2009 lows, the index looks very much like the technology stocks when they came off their lows in 2004. Tech and the semis went nowhere while the energy names exploded higher through 2007. Is it possible that this sector remains in the same mud that those sectors trudged through in the last bull market? Well given the regulation in the sector and the very weak lending environment, one has to wonder how the banks will increase profit margins much. Sure, if the financial conditions continue to loosen and the money multiplier starts to move upward, things might be different but till then, the profit picture here seems murky.
As for the sector, lets look at the P&F model. First momentum is turning negative with the Momentum2 model showing a lower high with the recent movement to the upside. The Trender rolled over in April with a break of the upper band and since then has basically moved downward below major trend support. The PF model actually remains bullish but is leveling off. Lastly, the relative performance by the sector versus the S&P argues that such will be weak going forward. There is some support in this region from late last year in terms of the ratio so we will have to see if it bounces. If not, then the market as a whole could have issues because the financials will be falling to a lower low.
Overall, this picture argues that banks are probably a sell at this point. The indicators are all weak and the profit picture is ugly.
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