Financials come alive--raising the odds for a fourth quarter rally

11/05/2010 8:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I’ve posted repeatedly in the last few weeks that it would be hard for this rally to extend a lot further unless we got leadership from financial stocks.

Financials jumped yesterday, November 4—and that may mark the leadership I’ve been looking for.

The Financial Select Sector SPDR ETF (XLF) has been trapped in a range for the last six months that has topped out at $15.00 or so. Every time the sector has built up a head of steam, it has driven up to that level and then pulled back.

Yesterday looks like the sector finally might have enough energy to break out to new levels. From the start on November 4 at $14.89 the sector ETF (exchange traded fund) moved steadily higher throughout the day and finally closed at $15.23.

The sector had the benefit of a lot of positive news, rumors, and sentiment.

The biggest was the general rally set off by the Federal Reserve’s announcement that it would buy $600 billion in Treasury bonds by next June. Financial markets around the world saw that money as a huge injection of capital that would propel prices of stocks, real estate, and other assets higher. Asia markets rallied which helped European markets rally which helped New York markets rally.

The financial sector also got a boost late in the day from rumors circulating around 3:30 ET that the Fed would allow well-capitalized banks to raise dividends.

For the day JPMorgan Chase (JPM) gained 5.5%. U.S. Bancorp (USB) was up 4.6%. Wells Fargo climbed 3.8%. And Bank of America (BAC) moved up 5.3%.

The momentum in the sector completely overwhelmed a report from Standard & Poor’s, released at 2:30 ET, that the big banks faced a cost of $43 billion to buy back mortgages from investors in mortgage-backed securities. The banks, S&P reported, have already put aside $12.4 billion toward these costs, leaving them with an outstanding problem of $31 billion.

Yesterday, nobody cared.

The charge in financial stocks got backed up from other critical sector, technology—or actually to be specific, chip stocks.

The Semiconductor Holdrs (SMH) broke above its April 2010 high led by stocks such as Texas Instruments (TXN), Broadcom (BRCM), and Novellus (NVLS), all of which hit new 52-week highs. Even Intel (INTC), which has trailed the market for months, showed signs of life yesterday with the stock posting a 2.4% gain that took the shares to a new three-month high.

If financial stocks and chip stocks, two crucial leadership sectors, can build on this strength over the next few days, the odds for a fourth quarter rally will have improved markedly.

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