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Bank Index Still Underperforming


No bottom until financials outperform.


Sometimes all your fears come true. Here are some of the points we collectively worried about:

  • Even though in the 2000-2003 bear market there was one 6-month rally, most bear-market rallies, on average, last about 2 months. So, given that the low was reached on November 20, 2008, we might be entering a more vulnerable time in the market action.

  • Interestingly, the bulk of the gain came on the first 2 days, after the low. Since then, while some beaten-up equities have continued to add onto further gains and breadth has expanded, the major indexes gains have been marginal.

  • It's probably become monotonous to hear this repeatedly from yours truly, but the reality is that I remain concerned about the underperformance in the Bank Index. My assessment of bear markets has concluded that even average bear-market rallies get adequate financial sector participation - and real bottoms definitely need financials to be the outperforming, not underperforming.

    Click to enlarge

    In the above chart, do you see a descending triangle? Successive lower highs and the same support level getting repeatedly hit (around 40.5). I don't even have to talk in fancy technical terms to see that this is a sign of weakness, both in absolute and relative terms.

  • Again, my eyes might be fooling me, but I continue to see bearish ascending channel/ wedge formations in major indexes. Here's the IWM, for instance.

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    Click to enlarge

What now? Well, many sentiment/technical indicators are not oversold as of yet, but some of the most elementary ones that I look at, for instance, the percentage of stocks above 10 day average, is definitely in oversold territory.

Also, this is no guarantee of future ultra-short-term-rise, but today is the 6th day of market decline and we have eroded almost 100 points on the S&P 500 since January 6th.

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No positions in stocks mentioned.

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