The Financial Sector Roadblock

May 28, 2008
By seadmin

Last week’s sharp, equity sell off was a great example of the powerful psychological significance of the 200-day moving average. One look at the chart below of the S&P 500 index illustrates precisely what I mean.

As you can see, the S&P 500 raced up to its long-term, 200-day moving average (red line) a couple of weeks ago, but almost as soon as it got there stocks were knocked right back. It’s almost as if the market put up a roadblock that read: DANGER, ROAD AHEAD CLOSED.

So, what caused the sharp retreat in equities last week? As I’ve pointed out so many times during the past year, the culprit that keeps plaguing the overall market is the pernicious slide in financials. To see just how uncomfortable the slide in financials has been, take a peek at the chart below of the Financials Select Sector SPDR (XLF).

As you can see, the sector is in freefall mode, as last week’s sell off brought about a drop in the sector below its short-term, 50-day moving average (blue line). This breaching of support at the 50-day average is really telling, and usually signals some very serious downside yet to come.

The very best case scenario for financials is they’ve "bottomed out," meaning that they’ve fallen so low that there is no where for them to go from here but higher. Unfortunately, I don’t think we are at the bottom for the sector yet, and the drag on the overall market because of the action in financials will likely continue for some time to come.

The question now for investors is what to do?

Many people out there are selling out of fear and buying on hope. Conversely, I’ve had many people tell me that they are buying out of fear and selling on hope. Hey, I understand the confusion about how to approach this market. Fortunately, there is a way to put emotions aside and be objective about what to do right now.

In my Successful Investing service, we use objective criteria to help us get in the market when the going is good. More importantly, we use the same objective criteria to help keep us away from dangerous market slides.

If you’d like to find out how you can put a little objectivity back into your investment tool box, click here.

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