Financials Lead Market Lower Again

03/09/2009 10:52 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, looks at support levels and the importance of holding them short term.

Banks lose more ground as investors lack confidence in their survival. Since July of 2007, this issue has hung over the broad market. The Dow Jones Banking index was near its high of 581, and on the surface, things looked good for the balance of that year. Then the pieces started to unravel from the creative mortgage packaging from the major mortgage companies and banks. Today the Dow Jones Banking index is at 82.61, down nearly 500 points or 86% in 19 months.

The fallout continued this past week as the financial sector lost 18.6%. Overseas, more bad news started over the weekend, which is likely to lead to more selling this week in the sector. We can all prognosticate what needs to be done to stop the hemorrhaging, but it starts with confidence in the system. So far, Treasury secretary Geithner has not done what is necessary to create any such confidence. In fact, he has hurt more than helped with a lack of details on what the government plans to do, if anything. Until he defines the course of action, this is likely to continue.

The broad market indices were down more than 6% with the small cap stocks leading the way. The Russell 2000 Index fell 9.8% last week. The Nasdaq Composite fell 6.1%, but more importantly broke below the November low. All of the major indices are now below key support marks.

To make matters worse, the economic data did nothing to offset the news from the financial sector. The jobs report showed a loss of 651,000 jobs and an unemployment rate of 8.1%. There are some towns and states around the country topping 10% unemployment. The news pushed the ten-year Treasury bond yield down 14 basis points to 2.82% after topping 3% last week. The flight to safety is heating up again as money is on the move to avoid the downside of stocks.

Scanning the ten major sectors of the S&P 500 index, I found seven of the ten sectors holding above their November lows. This is different than stated above with all the major indices below their November lows. Maybe this is a sign we hold support and bounce? Or maybe this week they'll all break support, and the leg down, which started last week, will accelerate to the downside. I will be watching this for confirmation throughout the week.

All ten sectors are in a short-term downtrend. The latest high on February 6th started the current trend lower. Resistance for most sectors is the ten-day moving average. The table below outlines the ten sector ETFs and what to watch for this week.

Healthcare, consumer staples, and technology were the winners for the previous week, down only 3%. All three are still above their respective November lows. You know things are bad when being down 3% for the week makes you the leading sector!

Utilities continue to crumble under the pressure of the Obama budget proposal, which calls for tax on gas emission not complying with the global warming standards. This pushed the sector down 8.5% last week. The index has fallen more than 20% the last three weeks. The Dow Jones Utility index closed just above the November low of 294, but the damage the last three weeks is more than enough to make you run from the sector. However, it is worth watching this week for a bounce off support at the low or a break lower through support.

Industrials fell 9% for the week as investors continue to sell. What's the problem? Perception of what is on the horizon from the White House and the budget proposal. This is just one of the sectors being hit by the fear factor of what Washington is doing to capitalism.

This will be an important week for many of the sectors as well as the broad market. Friday I did a video showing the key support points and charts of what sectors to watch this week for opportunities. The video is under the Daily Exchange on the home page of my Web site if you would like to view it for more data on each sector.

Of course, this leaves us with the million dollar question—What now? Nothing has really changed from my perspective. The downtrend remains in play and in control of the broad market. The selling is a result of fear and the war on capitalism. The news remains on the negative side along with the trend. If you don't have a disciplined strategy for approaching this market, don't risk your principal. Cash is a sector, and for now, it is one that rules my portfolio. 

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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