Financials Drag Market Down

Saturday, March 07, 2009

Fundamental Take:
The market gained 32 points Friday capping a dismal week for the indexes. The Dow lost 6.2% for the week losing another 436 points closing at 6,626. AIG set the tone for the week Monday morning reporting the largest corporate loss in Wall Street history losing $62 billion in the fourth quarter. In turn, the financial sector was a massive drag on the indexes losing 18.7% for the week as investors fled banking and insurance stocks. The financial sector has now lost 50.6% year-to-date! At least some of these brutal losses can reasonably be seen as a referendum on the Obama administration and Timothy Geithner's plan, or lack of a plan, for the banking sector. Citigroup hit a new low of 97 cents this week after the government increased its common equity stake to 36% by converting its preferred position. General Electric lost 17% for the week as fears mount that capital losses in the GE Capital division will precipitate a downgrade from its AAA rating status. GE attempted to calm fears stating that it does not need to raise capital, has reduced its use of the commercial paper lending facility and only in a disaster scenario would it use the available TARP funding. The week ended with more disappointments as the US lost 651,000 jobs in February and unemployment ticked up to 8.1%, a 25-year high.

Technical Take:

The market eked out a 32-point gain in the final 30 minutes of trading on Friday as the Dow rallied 160 points from the low of the day into positive territory. Rallies are always welcome but pessimism and despondency are ultimately in control of this market. The technical landscape does not offer much hope as prices continue to dribble lower week after week with the Dow now down 24% year-to-date. Technicians anxiously await the day when selling intensifies, stocks capitulate and then reverse course. The slow trickle lower and lower is tough to trade and offers nothing compelling. This week will likely see a day when sellers come out in force and weak hands finally give up in a cascade fall. This typically leads to an exhaustion of selling and the market roars back as shorts cover aggressively and then buyers chase higher and higher prices. This reversal day likely accompanies a large spike in the VIX out of the range it has oscillated in around 50 for the last few months. A day of capitulation will then give a bottom against which to trade and a new range will develop. In the cycle of market emotions, it seems we have reached despondency closing in on depression but the technical landscape has yet to support this claim.


Anonymous said...

50% in 2 months, disgusting!

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