LG, there are probably many reasons why the broader market is now at new lows while the financials are not. Here are some of my thoughts:
1. Margin Calls - profitable positions may end up being sold in order to avoid / balance large losses on financial positions still held.
2. Naked Short rules - Some financials like Zions bank had 65% of their float short in June, which is unlikely to be repeated in the new regulatory environment. Many of the regional banks had short positions in excess of 15% of the float.
3. Relative Strength - WFC and JPM and, to a lesser extent, BAC are now seen as towers of strength in a very weak financial environment. In July there was not as much certainty regarding them.
4. Re-Balancing - This is just speuculation, but if they have taken out FNM, FRE, LEH, WM, WB, and AIG and replaced them with stronger entities, that may be helping the index. If all these entities were still in it at their final trading price, the index could probably be lower.
5. Bailout Effect - Once the bailouts started, the worst
possible scenario for some companies went from FDIC
takeover or bankruptcy to government rescue. This is
likely being discounted in the prices of some of these
stocks.
6. Hedge Fund Redemptions - Hedge funds may likely carry
larger cap holdings and index positions. Unwinding these
to address redemptions is probably accelerating some of
the downside we're seeing. I believe even Dr. Marc Faber
said hedge funds were going to start dumping AAPL, RIMM,
and GOOG in early September to front run much of this,
as these were some of the last strong large cap momentum
tech stocks still levitating.
7. RUT and MID kind of late to the party - Many of those
listed in the XLF are part of the RUT and MID, which until
today have had some relative strength. It was almost as
if we were seeing a long RUT/short SPY strategy there for
a while.
8. History - in July 2002 the BKX put in a low in July but
only tested that low in October while the other major
indices made lower lows. I believe the Trannies did the
same thing, as did the BTK. Maybe the BKX leads in this
way this time as well.
The BKX took out a triple bottom at the close, so I don't
know how long the relative strength of the XLF will
continue.
Those are just a few of my thoughts.
ajtj99
AI
