Minyan Mailbag: Is the Bottom in Sight?
Not a time to go fishing.
The market seems seriously oversold. Is this the right time to invest in financials?
Investors have been searching for a tradable bottom in the financial sector especially, after the Fed's attempts to bail out Bear Stearns back in March. Honestly, Tuesday's stellar 6%+ move in the Banking sector sparked some hopes for that bounce. But Wednesday's price action was really flabbergasting. It not only reversed the earlier action, it also caused further price erosion in several other key sectors.
Check out Financial Select Sector (XLF). It just hit a new intraday low today.
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And here's Lehman Brothers (LEH). Honestly, I see no signs of life, my friend.
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I believe that until price confirms the change in direction and then follows through in that direction, it can be foolhardy to take pre-emptive actions and place pre-emptive trades.
I know fundamentals seem bleak but I also believe that the market is the best 'tell'. Just as the homebuilding stocks peaked in July-August 2005, but the housing sector started showing cracks only in summer of 2006, similarly, my view is financial stocks will show some signs of life before the sector actually recovers. So far, we haven't seen any indications that the market is ready to bottom in these financials.
I would personally stay away from bottom fishing here, no matter how appealing the 'value' and how alluring the reward! As I was telling a friend yesterday, financials will most likely need to go in recovery after such a long stint in the ICU and that might mean that one might do better holding the 'other-financial instrument,' the U.S. dollar, rather than trying to look for the bottom in this 'oversold' sector.
"If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit."
- Jesse Livermore
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