Bank Rally Fading

All good things come to an end. So it was today for the furious rally in financial services stocks which began last week. This is not particularly surprising, given that the explosive upturn was engineered by non-market forces that will remain nameless but whose mailing addresses are located in Washington, D.C. One could argue that, just as the financial sector was deeply oversold by most standards and due for a bounce, it is now overbought and needed to take a break. If this is the case, the sector will soon resume its march upward after a brief consolidation. For the moment, financials remain in a long-term and intermediate-term downtrend. The same is true for the broad market.

Two other important news items helped drive financials down today, along with most other sectors. First, data from the National Association of Realtors reported an unexpectedly large drop in home sales. Second, bond wizard Bill Gross of Pimco published one of his always-interesting reports which projected mortgage losses will eventually add up to a trillion dollars. Given that banks have so far written off only about half that amount, this indicates more losses are coming.

Crude oil prices found a little support in the $123 area and rose slightly today. Sentiment remains bearish, however, and today’s gain may simply be a round of short-covering. Even after the recent downturn, crude oil prices are still up about +70% in the last year. This means the energy correction is unlikely to be over. To see how we’re protecting subscribers, check out:

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