Financial Shares Whacked, 3.6% Loss

Monday, April 20, 2009

Fundamental Take:
Stocks dropped today losing 289 points after Bank of America worried investors with credit losses. BAC reported first quarter earnings of 44 cents per share, far beyond the 4 cents consensus expectation. Revenues handily beat by almost $9 billion coming in at $35.8 billion. Yet, analysts were unnerved by the near $5 billion increase in the provision for credit losses and the 25% increase in quarter-over-quarter net charge-offs. BAC shares free fell dropping 24.3% for the day. Citigroup shares took a 19.5% hit after Goldman Sachs released a report stating that C's credit losses are accumulating rapidly. The final straw for the financial sector was a Wall Street Journal report showing that the largest TARP recipients are still lending at lower levels than before the credit crunch. Even with BAC CEO Kenneth Lewis attempting to reassure investors claming that the bank 'does not need more capital', the financial sector plunged 11.2% Monday.

Technical Take:
Some profit-taking was expected eventually and today may be the beginning of a modest pull-in. Even with today's decline in financial shares the sector is still up 67.9% from the March 6th low. Most banks and insurance companies have seen massive bounces off extremely depressed levels. The first bounce is easy as weak shorts cover and timid buyers bottom fish. Yet, major new trends only occur as volume increases and institutional buying steps into the market. The Dow remains 21% off the bear market lows as of today's close but has failed to push through the 8,000 level with conviction. Friday was the third attempt to mount a sustainable move higher and today that move failed. I would expect a pull-in to 7,500 after seeing the voracity of today's selling. Yet, I do not think the market will retest the lows given the strength of the bid in stocks. Real money will finally have a chance to pick up shares on this pull-in over the next several days.


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