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The financial sector got us into this mess and many people continue to say the financial sector has to get us out. Interestingly enough, financials are now 10.81% of the S&P 500, so they have come down in importance over the last year.
Let's look at the highlighted areas of the chart
First, prices formed a double top in 2007. In the late summer they fell below the 200 day SMA
1.) Prices rallied about 12.5%, but ran into upside resistance at the 200 day SMA. The 200 day SMA is considered a dividing line between bull and bear markets, so when prices can't get about this technical level it's usually trouble.
2.) After falling about 20%, prices attempted to rally. But notice that prices ran into upside resistance at the low from the previous rally.
3.) Prices form an upward sloping triangle pattern and rally about 21%.
4.) Prices again run into upside resistance at the previous low.
5.) Prices form a triangle consolidation pattern.
Notice that throughout this sell-off, prices fall into a standard lower low, lower high pattern which is indicative of a bear market.
Note that prices are over-bought according to the MACD. Also note the MACD is on the verge of giving a sell signal.
The RSI is giving us a luck-warm reading right now; 56 is right in the middle of the RSI's range.
On the three month chart we have a great example of the "which trendline is the real trendline?" Notice there are two viable trendlines. If the first is the "real" trendline -- meaning that is the line that prices follow -- then prices have already broken thrend and are running into upside resistance. If the second line is the real trend line then the rally is still intact. I think the first line is the primary trend line because it has the most actual contacts with price.
Fundamentally I don't think we're anywhere near out of the woods with the financial sector. First, we've just started the clock ticking on the stress test time period of 6 months. There is a news story today that Citigroup and Bank of America will have to raise more capital (if they can). In addition, we're right at the beginning of a possible second wave of meltdowns in the commercial real estate sector. The latest Quarterly Banking Profile from the FDIC shows a continuing deterioration:
Expenses associated with rising loan losses and declining asset values overwhelmed revenues in the fourth quarter of 2008, producing a net loss of $32.1 billion at insured commercial banks and savings institutions. This is the first time since the fourth quarter of 1990 that the industry has posted an aggregate net loss for a quarter. The -0.94 percent quarterly return on assets (ROA) is the worst since the -1.10 percent in the second quarter of 1987. A year ago, the industry reported $575 million in profits and an ROA of 0.02 percent. High expenses for loan-loss provisions, large writedowns of goodwill and other assets, and sizable losses in trading accounts all contributed to the industry’s net loss. A few very large losses were reported during the quarter—four institutions accounted for half of the total industry loss—but earnings problems were widespread. One out of every three institutions reported a net loss in the fourth quarter. Only 36 percent of institutions reported year-over-year increases in quarterly earnings, and only 33 percent reported higher quarterly ROAs.
The bottom line is I think the rally in this sector has run its course for now.
