Matt Trivisonno’s Blog

The XLF financial-sector ETF bounced off of its March 17th low last week, but are bulls like Jim Cramer and Doug Kass (who is long Citigroup) justified in their jubilation? Not a chance. To see the no-brainer evidence for my contention, just punch up a chart of the BKX banking index. Not only has the BKX plunged through the March low, but it will soon be testing the fabled October 2002 low (just as I predicted on May 28th.)

XLF will continue to follow the BKX down.

Cramer wrote on Friday:

“In the end, though, despite these dramatic declines…the market didn’t go back to Bear Stearns levels, which says that the bottom we put in with that fiasco is HOLDING STRONG.”

Cramer, who does not believe in technical chart analysis, is ignorant of the fact that the first test of an important support level usually holds. But the support will be tested again, and judging by the increasingly bad news-flow coming out of financial companies, it will not hold.

Let’s keep in mind that Cramer urged college students to buy “just 1″ share of Goldman Sachs (GS) and Sears (SHLD) on his “Mad Money” TV show last year as the market was peaking. Any student who took his advice now needs to work two summer jobs - and can’t even find one job in this contracting economy.

As is often the case, Cramer holds self-contradictory positions. For example, he currently believes that there is a 50-50 chance that the Countrywide Financial acquisition will take down Bank of America. He hates AIG, and is very negative on just about all financial stocks. And he is cheering a bottom? Ridiculous, and maybe even certifiable.

Kass Takes On Whitney

Doug Kass, who made big money shorting financials, and is now calling a bottom, is claiming to be a better banking analyst than Meredith Whitney. Last week, in the Columnist Conversation area of RealMoney.com, Kass dismissed Whitney as a former, mere underling, and said that he had “better spreadsheets”. On Larry Kudlow’s CNBC show Friday night, Kass made a sneering remark about Whitney.

Of course, Kass is being foolish. Whitney’s comments move the market; Kass’s do not.

The fact that bulls like Cramer and Kass are already cheering indicates that this dead-cat bounce in the financials is likely nearing completion. The birth of a lasting rally is met by skepticism, not jubilation in the bull camp.

A Hostile Fed

The market bottomed in March because the Fed saved the world, and the bankers were able to sell a “the worst is behind us” theme. This time around, financials are faced with a potentially hostile Fed that might raise interest rates, and what kind of idiot would believe a banker today? The level of lies that has come out of firms like Lehman and AIG couldn’t have been written by Stephen King. This is not the stuff of which bottoms are made.

In addition to threatening to raise rates, the Fed is ordering some banks to stop paying dividends. Here is an example from this Wall Street Journal article:

“On June 3, the Fed released a copy of a notice it issued to Millennium Bankshares Corp. in Reston, Va., in which it told the bank that it shall “not declare or pay any dividends without the prior written approval of the Reserve Bank.”

How embarrassing! I can just hear an underling telling the boss: “Sir, Chairman Bernanke just sent as note telling us to stop being stupid.”

All jokes aside, this is important because maintaining dividends is one of the ways banks pretend like nothing is wrong. It will not be good for share prices.

It looks like the poor Consumer Sentiment report on Friday has taken a lot of air out of the possibility that the Fed will raise rates any time soon. However, David Merkel proposes another possibility: that the Fed will hike, and then quickly take it back after the ensuing mayhem.

Bernanke may be doing an imitation of Paul Volcker right now because Volcker is part of Team Obama, and Bernanke might not want to get “CHANGED” when Obama appoints the next Fed Head. Don’t forget that it was a Democrat (Jimmy Carter) who first appointed Volcker.

So, even though raising rates here would be crazy from an economic perspective, it might still be done for political reasons. And while shorts took profits last week on rumors of a Lehman take-over, any such deal is very unlikely to get the Bear-Sterns treatment from the Fed. All signs point to the Fed blessing another leg down for the banks, and a strong possibility that they will “make an example” out of a firm to send a message to the rest of the industry: This isn’t Japan; there will be a workout.

The MACD Divergence

If you put a MACD onto the XLF chart, you will see that there is a divergence between last week’s low and the March low. This means that there was less selling pressure last week and would normally forecast a lasting turn. However, no indicator is perfect and I think this is one time that MACD and other similar indicators will fail.

The XLF is back down where it is due to a continuation of bad news coming out of financials. In March, it got down here on rather dramatic levels of sheer panic. You would think that the absence of another panic would see the XLF substantially higher, but it is not. Its very presence at the March lows without a panic is very telling. So, I think prices got pushed down excessively in March and created an artificially low MACD reading.

The XLF Chart

Notice the blue down-trend line on the XLF chart below (click to enlarge). The line is very well established, having rejected prices at several points:

The XLF will have to contend with that overhead resistance very soon. Now look at the three sets of parallel green lines that bound the three throw-back rallies.

The top-most throw-back rally was a classic “bear flag” pattern. The second and third throw-backs have been sharper due to more shorts building up and then being burned off.

Last week’s trading had higher volume which might indicate a selling crescendo. (If you have ideas about the volume pattern, please post in the comments.) However, I don’t think we will get a crescendo bottom here because of the dramatic drop-off in volume on Friday. This indicates that the buying was done by weak shorts getting squeezed out, and no large funds are accumulating financial shares here.

Also, if the XLF were to hold here, the chart pattern would change to a rectangle - a type of pattern that is rare in bear markets. If the economy were actually recovering, I would consider that a possibility. But the economy is continuing to weaken, and bear-market rallies aside, stocks are likely to fall until some signs of life are seen. Don’t be fooled by the positive GDP numbers, which are not properly deflated.

More Points

Jimmy Rodgers said recently on Bloomberg that he is short the iBanks because banks go to $8 a share during a housing recession. So, it is Rodgers and Whitney versus Kass and Cramer. I am betting on Team Whitney.

Australia and the UK are joining us in the housing/banking collapse.

And finally, Rebecca Darst at RealMoney.com reported Friday afternoon that put-buying in regional banks has gone wild.

The Market in General

The S&P 500 has snapped back pretty hard off of its oversold condition last week, and another strong rally could have it over-bought a lot faster than anybody is currently expecting. So, I’m geared up to short into any rally as early as Monday. This just might be the last opportunity for a good entry point before the next big whoosh down.

This entry was posted on Sunday, June 15th, 2008 at 1:32 pm and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.