Back in August, I posted about some interesting divergences in implied volatility in the technology and financial sectors. Fast forward two and a half months and with Citigroup (C), Merrill Lynch (MER) and their brethren in the dog house while Google (GOOG), Research in Motion (RIMM) and the most of the other large cap tech stocks on a tear, the story has morphed from diverging implied volatility to diverging performance and future expectations. So this seems like a good time to look at my favorite AMEX Select Sector SPDRs again to see what has happened. In the chart below, I compare the plight of XLF, the financial sector SPDR (XLF top holdings), to XLK, the technology sector SPDR (XLK top holdings.) Where I see the big divergence in performance is following the second week in October, from which point the financials have been beaten down almost as badly as they were during the dramatic July-August drop. The interesting part this time around is technology stocks, which fell in sympathy with financials during the summer, yet have been almost unassailable during the past three weeks.
I am skeptical that the market can continue to remain in a bullish mode without the participation of the financials, yet, on the other hand, the fundamentals of technology stocks do not seem to warrant that they join financials on the bear side of the ledger. For now at least, the bears will have to be content with claiming victory in the financial, consumer discretionary and real estate sectors, while the bulls control the majority of the remaining sectors. Eventually, I expect all the bulls or all the bears to capitulate in a dramatic major move. I’m not sure whether the move will be up or down, but each sector skirmish will provide some additional clues.
It's a much longer time frame (1990-2007), but I feel compelled to highlight a great chart by the folks at Bespoke which details the long-term Citigroup trend line, showing dips during important financial crises providing critical support levels.
ReplyDeleteIs there a story that says the financials are in their own penalty box with subprime, but the rest of the market may be fine? I think the financials are reaping what they sowed and they will take the brunt of the impact. Which is fine considering how much money they made on the way up.
ReplyDeleteInteresting comparison, nice charts.
ReplyDeleteI'd like to think that the Financials might bottom soon - it seems like companies such as BAC with a 10 P/E and 5.6% yield are relatively cheap - and C seems overdone. Hoping for some support to show up doen here on both of those.
Interesting post, good comments. A conundrum that's been worrying me as well.
ReplyDeleteDon't the questions then become what we think earnings and profits will be in the tech sector ? To the best of my understanding the run in Technologies has been pretty narrow with bellweathers, e.g. GOOG, APPL, driving things.
Tech Ind Perform: http://tinyurl.com/2ufpqf
With a slowing economy at increasing risk the underlying question would then seem to be will capex hold up. And IMHO that is an optimistic presumption. Unless we think of course that the techs will get more and more of their sales abroad and foreign economies continue to grow. So if you take a hard look at economy vs profits vs earnings we get:
Markets, Profits & Earnings: http://tinyurl.com/2j297q
FWIW.
Thanks for all the comments.
ReplyDeleteI like the penalty box analogy, concerned, but I wonder if this is just a case of 2:00 for hooking or whether this is spearing, with an automatic game misconduct. Penalty box implies no contaigon -- and I'm not sure that's the case.
It will be interesting to see when the bottom fishing kicks into full gear with the banks. I have my eye on WM, but there are many others out there. Dividend policy announcements will make it interesting...
Finally, many of these large cap techs (AAPL, RIMM, GRMN, etc.) are largely dependent upon discretionary consumer spending not letting up. With rising oil prices, the end of the HELOC piggy bank and growing concerns about the future, I don't think the consumer will be as free spending as in the recent past. This will be interesting to see.
Speaking of CAPEX, CSCO has been firing on all cylinders lately. It will be interesting to see if Chambers injects any caution into his comments this evening.
Cheers and good trading,
-Bill
As a nice complement to the above, Bespoke highlights the differences in sector Q3 earnings reports to date.
ReplyDelete