The big news for the markets during the past week has been the flurry of buying taking place in financials. Stocks in the sector have enjoyed a rally of nearly 30% off their recent lows, primarily due to some better-than-expected earnings announcements from major players in the space.
Lending a helping hand to the sector was the federal government, which made it known that it wouldn’t allow ailing lenders Fannie Mae (FNM) and Freddie Mac (FRE) to go down in flames. Add to that the Securities and Exchange Commission’s (SEC) decision to freeze so-called "naked short selling"in 19 top financial institutions — including Fannie and Freddie — and you get the ingredients for a nice frothing in financials.
The chart above of the Financials Select Sector SPDR (XLF) clearly shows the sharp rise in the sector just since last week. The rise in financials also has brought about a rise in the overall market, as witnessed by the chart below of the S&P 500 Index.
The question now for all to ponder is if this is a bottom for financials and for the general market?
In my opinion, the answer is no.
I still think we are in a bear market, and when you have a bear market you have the inevitable bear-market rally. These rallies usually are fast and furious, and they usually take place in the most beaten-up market sectors. Unfortunately, these rallies usually fizzle as fast as they foam up.
The prudent course of action here is to wait and see what transpires during the next several weeks before putting any money to work in this tricky bear market. The last thing you want to do is get fooled by a soon-to-fizzle flurry in financials.