Financials Rally Worldwide

10/02/2008 12:00 am EST

Focus: GLOBAL

Eoin Treacy

Global Strategist, Fullermoney.com

Eoin Treacy, global strategist at Fullermoney.com, says global banking indices appear to be in an up trend.

We have recently seen tumultuous moves by the majority of financial shares. Financial shares are a lead indicator for the stock market, and their outperformance is something of a prerequisite for any recovery in the current environment.

The banning of new short positions in financial shares until January led to a spectacular rally in the FTSE-350 Banks. Relative to the wider index, it found support in mid-August above the July lows and rallied from 2.25 once again. A sustained move below that level would be needed to question the potential for an upside break.

The Standard & Poor's TSX [Toronto] Banks (STBANKX) found support in July and formed a consistent up trend relative to the wider index. The sector found support at the top of the prior range last week and would need to sustain a move below 1.275 to offset its scope for further up side.

[Japan's] Topix Banks (TPNBNK) Index also broke upwards relative to the wider index and would need to sustain a move below 0.205 to question its scope for some additional up side.

The Hang Seng Financials Index (^HSI) also remains in a consistent up trend. Banks in China, Thailand, New Zealand, Korea, Taiwan, and Singapore are still lagging their wider indices and have some work to do before they can demonstrate meaningful outperformance.

Interestingly, banks where the credit scare has been focused are doing best relative to their indices and are most likely to continue to benefit from any short-covering rally. The fact that bank shares are now beginning to outperform will not be lost on investors, as solutions are found to help banks improve their balance sheets.

I believe the current talk of moral hazard and the cost of bailouts is beside the point. When markets become disorderly and panic is allowed to set in, it is the responsibility of the authorities to intervene and help restore confidence. Suspect companies should be allowed to go to the wall, but not at the cost of the rest of the financial system.

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