Financial sector turning around, or just a dead cat bounce
The past two weeks have been very forgiving to the financial sector. Even as banks are writing off billions of dollars of bad loans and pumping up reserves to get through this downturn, it seems like investors are starting to find a bottom. After watching XLF, a SPDR for the finance industry, tumble from $36 in May of 2007 to $17 this July it seems like some are finding a place to buy.
Though the catalyst behind the finance industry’s fall is far from gone, the share prices of most banks have been deemed to be oversold. We’re trading prices here, not the subprime housing market.
Just by looking at the volume for XLF you know there is plenty of interest in the turnaround of the financial market. Last week, XLF recorded volume of 1.8 billion shares, that’s a crazy number for a SPDR that tracks a whole industry. Are we seeing a turnaround or is this just a dead cat bounce?
My vote is for a dead cat bounce. Looking out more than the next six months, the finance industry has plenty more mortgages to write down. It seems as though we’re closer to the beginning than to the end of the credit crunch. And you never know what the day to day will bring, a warning letter about IndyMac led to the withdrawal of millions in assets that practically brought down the bank. This kind of volatility is tough to trade.
If this is just a dead cat bounce I’d say it still has some life left. The SPDR can run up easily to $24 before hitting major horizontal resistance. The Morning Star on the daily chart is comforting, though the run up can only last for so long. If XLF reaches to $24 in the next week, it’s a short sellers dream. Pile up on the shorts at $24, but let the market sort itself out for now.
