Financials Tell the Story

One could say the current financial and economic mess we are in started with the tech meltdown.

When I taught Technical Analysis, I use to show my students how far ahead of the curve Wall Street was by showing them charts of the home builders during the 2000 tech meltdown. Housing had hot spots across the country from time to time, periods of boom and bust, but generally speaking, the American's so called "greatest asset or investment", a home, accrued value in the single digits per year; until the housing boom. I can't speak for all, but I can say in our particular situation, our home more then doubled in value over a period of about 2.5 years (from the time we bought it and significantly more from the time the last owner had bought it). At one time, the land itself was worth almost 100% more then what we paid for the house. Builders were paying over a quarter of a million dollars just for the 1/4 acre lot and not even on the water. The house would be torn down and a McMansion would pop up in its place.

One of my favorite charts was HOV, the stock stayed pretty flat for well over a decade, occasionally reach $7 or $8.00, but usually trading around $5.00. Something changed in 2000 as the dot.com bubble burst and HOV went from $5.00 to $70+ in about 4 years.

 Around 2000, the market was falling off a cliff, but who would have suspected home builders were to be the next hot item? Look at the accumulation in 2000, prices were near their lows and 3C was making new highs.

It didn't stop there, the trend was confirmed for sometime at the green arrow, until home builders topped out, you can see distribution through 2003/2005, but the new highs of 2005 were the final nail. It's a known fact that economic and other policy and regulations were set up to be very accommodative for home buyers. Some, including myself, suspect this was a gift to the banks after the massive losses they sustained during the dot.com bust. What ever the reason was, it seems the reaction to one bubble bursting almost always creates another bubble.

Lets take a look at our current problem, the financial industry. This is the industry that took down the American economy and nearly destroyed it. In my opinion, not much has changed except we've made some dangerous banks even bigger and more dangerous, but nothing structural has changed for the better. You could say economic policy has been that of "kick the can down the road long enough and hopefully we'll experience a recovery", but when the road starts coming to an end... then what?

 In green we have XLF, the ETF for financials and in red, the S&P 500. Note how the financials topped out at the green arrow, months before the S&P did. Now look at the 2009-present period. Look at the growth in the market versus the stagnation in financials. In fact, financials haven't gone anywhere since early 2010 and they are n much worse condition for a much longer period of time then when we saw the start of the bear market in 2007.

 This weekly chart of financials shows the distribution and 200 final negative divergence at the top. Presently the distribution is just about as long, but the current divergence is much worse between the 2010 top in financials and the 2011 test of that top. Right now we are in a much stronger leading negative divergence then at the bear market in 2007.

Looking at the current period, you can see we had less then a year of momentum, since then financials have been largely lateral and 3C is in a leading negative divergence that is lower now then when financials hit the bottom in March of 2009.

These charts alone of financials should be a warning that something is very wrong with this market, arguably worse then before. And what has really changed? The specter of one of the big banks failing now is a lot worse then it was in 2008, the banks are simply much bigger now. If Lehman almost stopped our economy, what would happen if a Bank of America was in a similar situation?

Be patient, opportunities are close at hand. This could certainly be worse then the first verse. I made a 5 part video seres in 2007, before the market really fell apart and while I didn't spend to much time on timing, my opinion was that the Dow would be trading around $5500 before this was over.