When a theme becomes so ingrained in the minds of traders and investors that the vast majority of them act on that theme, it’s usually about the time that that very pattern is winding down.

There’s no doubt that the biggest news story out there now is the worry about financials and the potential time bombs sitting in various accounts just waiting to be marked to market.  With the trillions in derivatives linked every which way, it’s easy to see how credit issues could sink the stock market boat, with financials at the helm.

I kind of doubt that we’ve seen the last of the issues related to the subprime morass, but something stood out to me as I was going through some of the indicators I follow... lots of folks have seemingly already given up on banks and brokers.

One of the guides I use to determine this comes from asset data gathered from the Rydex mutual fund family, and the ProShares stable of exchange-traded funds. By tracking asset flows among the various funds, we can sometimes get a pretty good idea about where “the public” is seeing opportunity – and risk.

The chart below shows assets in these funds over the past four years. I’ve highlighted the other times that assets in the Rydex Financial Services Fund has reached this low of a level – those times when apathy towards the sector appeared overwhelming. I’ll go over some stats after the chart that shows what’s happened in the past seven years when we’ve seen similarly low asset levels.


Click here to enlarge.

Since 2000, there have been 69 days when the fund has had its assets decline this much (encompassing what turns out to be really four distinct time periods – March 2000, March 2003, October 2005 and June 2006).

Looking at three-month returns going forward, it looks pretty good. For the Financial Select SPDR (XLF), the three month return was +10.1% with 67 out of the 69 days (97%) showing a positive return. On average, the most XLF went against us during that three months was a tolerable -2.6%. That seems especially acceptable since the average maximum gain during those same three months was +12.2%.

It follows that the components of banking/brokerage indexes did well, too.

  • Citigroup (C) showed a three month return of +7.6% with 75% of the days positive.
  • Bear Stearns (BSC) +6.5% with 75% positive.
  • Lehman Brothers (LEH) +11.8% with 86% positive.
  • Merrill Lynch (MER) 11.3% with 93% positive.
  • Wells Fargo (WFC) +10.3% with 99% positive.
  • US Bank (USB) +11.7% with 96% positive.

We never really know what’s brewing on the balance sheets of some of these institutions. But for some of the select “safer” banking and brokerage firms, any additional panic-type sympathy sell-off based on recent news headlines looks like it should be a better time to initiate or add to long positions as opposed to following the herd over the cliff.