Sam Collins

Have Financials Bottomed?

by Sam Collins   06/05/08

It was another volatile day for the stock market, driven initially by some bargain-hunting in the financial group spurred by Lehman Brothers' (LEH) rumored success in finding a backer.

Later, when nothing came of the story and Moody's Investors Service announced that it might downgrade the AAA ratings of Ambac Financial (ABK) and MBIA (MBI), the market turned tail and took back all of its gains, plus more.

General Motors (GM) led the blue-chip Dow Industrials (DJI) lower, falling 3.24%. And the financial members of the Dow helped drive it lower, as Bank of America (BAC), Citigroup (C) and JPMorgan (JPM) all fell. BAC had the biggest decline, dropping 2.1%.

But it was in some ways a day of extremes where, on one hand, the financial stocks took another hit, while other Dow (DJI) stocks had gains -- namely, Walt Disney (DIS) gained 3.5%, American Express (AXP) gained 3.0% and Intel (INTC) rose 2.4%.

The comments by Fed Chairman Ben Bernanke, who spoke at Harvard University, apparently didn't help either, as the chairman dwelled on the dangers of inflation. The chairman said that inflation is a "significant concern" and left the audience with the impression that the Fed's next step might be to take active measures to stem inflation.

At the close yesterday, the Dow Jones Industrial Average (DJI) stood at 12,390, down 12 points. The S&P 500 (SPX) fell just a point and closed at 1,377, and the Nasdaq (NASD) gained 23 points to close at 2,503.

Volume on the New York Stock Exchange topped 1.3 billion shares and on the Nasdaq (NASD), 946 million shares traded. Breadth was slightly negative on the Big Board and on the Nasdaq, as advancers led decliners by 4-to-3.

The July crude oil contract fell $2.01, closing at $122.30 a barrel. The Amex Energy SPDR (XLE) fell $1.26 and closed at $83.39.

The August gold contract fell $1.70 at $883.80 per troy ounce, and the PHLX Gold/Silver Index (XAU) lost $3.41 to close at $174.97. If gold is to hold within its current up-trending channel, it will have to make a stand soon. Its major support line now rests at $170 and yesterday's close fell below the 200-day moving average for the first time since late April.

What the Markets Are Saying

The S&P 500 (SPX) continues to hold within Zone A (support at 1,375) but barely.

What is most troubling is that this tepid performance is taking place while crude oil prices are also falling (down more than $10 from its high). Another disturbing sign is the failure of the Dow Industrials (DJI) and the NYSE Composite (NYA) to hold above their 50-day moving average lines.

As noted in my review of both Tuesday's and Wednesday's action, the financial group makes up the second-largest SPX sector and it is still falling.

The Financial Sector SPDR (XLF) fell for its third-consecutive day and now sits at $24.16, just above its all-time low of $23.45 made on March 17. There is little to indicate that the financials have yet hit bottom. In fact, two weeks ago, the XLF broke the bottom of a two-month consolidation flag, signaling that more selling was to come.

With internal indicators still slightly above the extreme sold-out levels, the put/call ratio neutral and other sentiment indicators just beginning to show fear, it is probable that the next level of support at SPX Zone B (1,320 to 1,375) is about to be tested. (For more information about what these zones mean, click here.)

Today's Trading Landscape

Earnings to be reported include: Alloy (ALOY), Analogic Corp. (ALOG), Bio-Reference Laboratories (BRLI), Blyth (BTH), C&D Technologies (CHP), Cantel Medical (CMN), Cascade Corp. (CAE), Ciena Corp. (CIEN), Comarco (CMRO), Del Monte Foods (DLM), G-III Apparel Group (GIII), Hayes Lemmerz International (HAYZ) and Jackson Hewitt Tax Service (JTX).

Also reporting today are: National Semiconductor (NSM), Nobility Homes (NOBH), Optium Corp. (OPTM), Quiksilver (ZQK), Rex Stores Corp. (RSC), Take-Two Interactive Software (TTWO), The Cooper Companies (COO), UTI Worldwide (UTIW), Vail Resorts (VAIL) and Valence Technology (VLNC).

The following economic reports are due today: the DJ-BTMU Business Barometer for May 17 and weekly initial jobless claims (the consensus expects growth of 1,500).

Verizon (VZ) is in talks to acquire Alltel just seven months after Alltel was sold in a leveraged buyout. The Bank of England left its key interest rate unchanged this morning at 5%. Smithfield Foods' (SFD) fiscal Q4 fell 94% to 2 cents a share vs. analysts' estimates of 7 cents. And Continental Airlines (CAL) said it will cut 3,000 jobs and sell part of its fleet as a result of high fuel prices.

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