Bailout Boosts Financials and Others

09/22/2008 12:00 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

The Treasury Department’s proposal to remove bad assets from financial firms’ balance sheets acts as a stimulus for the financial markets. Secretary Henry Paulson’s Resolution Trust Corporation-type entity to hold the bad debt from banks rallied the broad markets, but more importantly breathed life into a system in cardiac arrest.

Is it the solution? It was on Thursday and Friday. But the devil is in the details, and unfortunately we didn’t get very much in that regard over the weekend. This leaves the market open to volatility until those details are defined.

Financials were the clear winner last week, gaining nearly 6%. This begs the question, “Is it time to invest?” Well, yes and no. Yes, if you understand this is a long-term problem and that it will take long-term solutions—and a longer-term investment horizon, to reap the benefits. No, from a short-term perspective based on pure speculation about who will win and who will lose.

The SPDR KBW Bank Index ETF (Amex: KBE) is worth a look based on the move last week. A modest up trend was already evident before the move, and the break above the 200-day moving average shows momentum. SPDR KBW Regional Bank Index ETF (Amex: KRE) is a play on the regional banks. Thursday the ETF broke higher from the existing up trend.

Look for a pullback as a potential entry point on either. I like the banks versus the broader financial sector as the pure play on any government stimulus. (KBE closed above $39 Friday, and KRE closed above $41, but both were lower Monday—Editor.)

Energy was the silent mover last week. The price of crude quietly moved above $104 and the energy index gained 3.3% for the week. The S&P 1200 Global Energy Index was up nearly 10% for the week. Commodities overall were higher, led by gold. This puts the sector back on the watch list for a follow through off the lows, as it looks deeply oversold.

The iShares Dow Jones Energy Services ETF (Amex: IYE) jumped 10.8% from the September 15th close. This puts the commodity sector back on my watch list with the iShares GSCI Commodity Index (NYSEArca: GSG) as a way to play the index. (IYE closed below $42 Friday and GSG closed below $55.) 

On the down side, the worst performing sector was consumer staples, which lost 5%. Last week I highlighted this as one of the bullish sectors. SPDRs Consumer Staples ETF (Amex: XLP) closed below $28 Friday.

Why the drop? Money moved out of the broad markets Monday through the first half of Thursday. The rally that followed sent money back into the financials, energy, and basic materials. The move lower on the week doesn’t take it out of play, but definitely puts it on the endangered list.

Technology and utilities were both down 4% on the week and they remain bottom dwellers. The outlook for the sectors both technically and fundamentally is negative. The lack of economic growth continues to hurt the outlook for technology, and I have it as one of my sectors to avoid.

Meanwhile, utilities are struggling to get the needed price increases to meet the rising cost of fuel and coal. The recent drops could give some relief, but they would have to stick in order to benefit the sector over the longer term. I would still avoid both sectors for the time being.  Utilities Select SPDR ETF (Amex: XLU) closed at $35 Friday, and Technology Select SPDR ETF (Amex: XLK) closed below $21.

The focus this week is on Congress. The details of the bailout will dictate who wins and loses, and either way it will affect the broad markets in the future. This is a time to be cautious.  

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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