For those who read the crude oil / financials post and are interested in reading more about the current relationship between the USO (crude oil) and the XLF (financials), check out these two posts (first, second) at the VIX And More blog, or at greenfaucet. Bill Luby has created what he calls a "headwind index" that looks at the ratio between the XLF and USO. Interesting stuff.
Showing posts with label XLF. Show all posts
Showing posts with label XLF. Show all posts
As seen in the chart below, financials (represented here by the XLF) and crude oil (represented here by the USO) continue to diverge.
There have been numerous explanations for the recent move in financials (new SEC requirements generating a short squeeze, oversold stocks, reported numbers not as bad as expected for select financials, etc.), but I suspect that the recent sell-off in crude oil also has a lot to do with the short-term price action in the financials. The chart below shows the recent 10 day, 15 minute price performance of both the USO and XLF. Again, the divergence between the two, in particular the price action around sharp sell-offs in the USO, is of interest.
Source: BigCharts.com (10 day, 15 minute)While a simply chart comparison, I suspect that until the market has confidence that recent credit problems and sell-offs in housing are corrected, the price action in crude oil will continue to affect the performance of the financials, and the market in general. The financials have had a nice move over the last week, housing is still weak, the Fed is in a box regarding rates, the crude oil supply-demand balance still remains tight, and hurricane season has begun in earnest. Each points to continued interesting times for both crude oil and the financials. The impact of crude oil on the dollar, inflation, and interest rates also can not be ignored. While crude seems to be looking for reasons to sell-off the last week, I don't expect this trend to hold for long, nor do I expect the market to quit following crude oil movements as long as we stay around these current historically high levels.
There was a nice, shall we say really nice rally in the financial stocks yesterday, with the XLF surging up 12%. Fannie and Freddie also had big days. Down volume in the XLF has also recently spiked to record levels (twice), potentially indicating capitulation (see a nice article by Bill Luby at greenfaucet.com). Yet, I have to wonder how much of Wednesday's movement is based on the recent SEC changes in the short selling of financial companies, and how much is due to capitulation and a potential market bottom. Have all the problems with Fannie, Freddie, banking, housing, and credit been cured since we can no longer short without (heaven forbid) actually borrowing the shares we want to sell?
A WSJ article discusses the changes in the short selling requirements. In short, the SEC has created a temporary protected list of 19 financial companies that prevents naked short selling of their shares. The extra protection of the 19 companies will continue until July 29, but can be extend for 30 days beyond the original July 15 date, and could be extended to more companies. Now, instead of allowing brokers to sell a stock short as long as they have a "reasonable" belief they can locate the needed shares and actually deliver them, they will now need to make formal arrangements to borrow the shares before shorting. The new rules will prevent multiple brokerage firms from looking at the same available stocks from the same custodial banks, assuming they would be able to deliver these shares if necessary. While the stock prices of the listed companies reacted positively to the added restrictions, it is unclear that the companies themselves will appreciate the added stigma of appearing to need government and SEC protection. The effects of the new shorting rules on hedge funds - who actively engage in short selling - is also unclear, but certainly not positive as each will now need to secure shares first before shorting. Hedge funds do have the ability to use puts and swaps, yet those on the other side of these derivative trades may need to find other ways to hedge their exposure.
But is this the real problem, and will the current SEC changes really fix the underlying issues in the market? It is mentioned that short interest has risen sharply for financial stocks and the NYSE and Nasdaq markets since the last market correction eight years ago. But is this really any surprise? Financials have been one of the largest, if not the largest sectors in the market. Given that they are now suspect due to the recent credit and housing issues, and have been for some time, would you not expect both the financials and the market to see increased levels of shorting?
The recently increase in down volume experienced late last week and early this week may be the capitulation that the market is looking for. Regardless of whether it is or not, I am still not convinced that an SEC induced short sale restricted rally is the making of a recovery. If it is, what does this really say about our markets?
On Fast Money (CNBC, Monday), it was mentioned that Wachovia was setting up for a good trade. Reasons for the trade included the current write-downs (assuming that all the bad news is out?), and the mention of the stock approaching recent lows (the 3 month chart does show $25 providing some short-term support, but the longer-term trend looks less bullish). As a caveat, it was mention that any buy here should have tight stops, very tight stops. In general, it is probably more prudent to wait until one sees a break from the longer-term downtrend, currently at around $28, before stepping in the waters. Granted, you lose that 10% move, which I am sure the $25.50 trade with tight stops is hoping to capture, but the risk in financials in general is a little too steep. There are also new concerns with dilution, the reduced dividend, and the extra cash that is not needed for current write-downs ($7 billion in new stock offerings and saving $2 billion in reduced dividends to cover $4.1 billion in write-downs and credit loss provisions). Where is the other money going? If future write-downs are expected, and anticipated, then the stock may trade lower. On the other hand, if the extra cash is to sure up the balance sheet, and give Wall Street confidence that the bank can weather any new, smaller hiccups, then we may see higher prices. Either way, the recommended tight stops are certainly in order, and prudent, not just for WB, but all financials. If one really wants to consider any potential bottom move for financials, the Financial Select Sector SPDR (XLF) ETF may be a safer trade. It will help reduce your firm-specific risk, which still seems to frequently pop-up in this sector.
Ticker: WB, XLF
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