Ian Woodward's Investing Blog

Bank stocks in “capitulation”!

Analysts at Merrill Lynch on Friday said investors appear to be capitulating with regards to bank stocks, frustrated into selling them down to levels below their real values as the credit crisis continues to wreck balance sheets. The analysts also slashed their earnings outlooks for several large regional banks and said they will continue to boost loss reserves and cut dividends. From Reuters financial headlines today…

  • S&P may cut debt rating for Ford, GM, Chrysler
  • Ford cuts truck output as sales tumble
  • Merrill shares fall on rumors of profit warning
  • Market ends lower on banks, oil concerns
  • Analysts slash U.S. bank estimates more as credit worsens
  • Yahoo shares fall after reports of executive exodus
  • Winnebago tumbles; CEO warns on price war

We are now 5 weeks into this correction, with the DOW already -10% down from its recent rally high as shown in the chart below.  Wednesday could be a big catalyst day with Durable Goods Orders at 8:30am, Crude inventories at 10:30am, the FED announcement at 2:17pm (this is where the fun should begin…but in which direction?), and RIMM earnings after hours.  Before that, it should be a sleeper.  If the NASDAQ does not undercut early in the week, there

ss

So let’s turn our attention back to the theme of this note which is how might we know where the Line in the Sand is for two scenarios: 

  1. The Banking Index ETF, i.e, XLF holds support at the 2002 level of $18.52 or higher, finishes the capitulation and reverses to the upside.  This will also imply a capitulation to the Limbo Bar (Lowest High Jump) for XLF which is $18.66 and -35.4% down from the 200-dma. 
  2. We have a Major capitulation that borders on a crash in the Financial Markets and heads even lower to establish a New Limbo Bar Low of > -35.4% from the 200-dma. Why all this excitement in using the Banking Index as the focus for understanding the degree of severity for the possibilities of this correction?
  • Sub-prime problems have taken their toll on Financial stocks and the Banking Index. 
  • What many have not realized is that the Banking Index is a fraction away from making a 100% drop down to its 2002 support levels.
  • The July 25 calls of 297,929 to puts of 62,653 provide a ratio of 4.8 which is a massive expectation to the upside on the XLF and Banking Index.
  • Daily Volume is once again showing signs of rapidly increasing with today’s volume at a staggering 188,753,200 shares and a dollar volume of $4.19 Billion
  • Lest we get too excited, I do not expect full capitulation until this number exceeds $7 Billion, and if you don’t believe me we exceeded this number on the previous Base Low when we hit $7.1 Billion on March 18, 2008, as shown in the following chart:

chartNote how there have been several attempts by the bottom fishers to find support only to capitulate and the Index head down again to find support, as it has trundled down to current low of $21.00 which it hit today:

2002 Note how the Dollar Volume has gone into oscillation in 2007-08, and that it has peaked several times above $6 Billion, so we should expect that at capitulation.  Now let’s look at the Limbo Bar picture:

limbo 

With all the financial turmoil along with the speculation in Oil no one knows where the Market will find a bottom, but at least you now have the guidelines and yardsticks to watch and measure and take action accordingly.

Best Regards, Ian.

4 Responses to “Bank stocks in “capitulation”!”

  1. David Galardi Says:

    Ian,

    Outstanding, Bravo, Excellent!, This all accounts to an O.B.E. for you! What a wonderful analysis of what we are seeing in the financials! Amongst our group of folks we are seeing things similarly, but have not been able to capture the spirit of the discussion as you have.

    We all are on Eureka look-out! I can just see myself sporting the Mr. Magoo glasses looking over the horizon…

    http://rightsfield.com/wp-content/uploads/2007/01/mr_magoo.gif

    Best Wishes… David

  2. Buddy Tumbarello Says:

    Ian,

    Great post on the XLF. And I do believe the XLF will be a good indication of how much longer the downturn in the market will go on. I am a believer that this recession will likely see the XLF push to new lows….as the commercial real estate part of financials is the next shoe to fall.

    Again….great post.

    Buddy

  3. ian Says:

    Hi David and Buddy: Many thanks for your feedback and compliments. I’m glad the blog struck a chord. I always enjoy your succinct notes Buddy on weatheronwallstreet.blogspot.com. Keep up the good work. Best Regards, Ian.

  4. Theresa Hui Says:

    Hi Ian & Buddy,

    Thank you, Ian, for directing us to Buddy’s “blog site” weatheronwallstreet.blogspot.com. Ever since you mentioned this site, I’ve been checking for Buddy’s blogs as well as yours on a daily basis.

    Thank you both for so generous in your guidance & in sharing your insights with the poor, often uninformed & clueless individual investors like me who are forever at the mercy of professional traders.

    Even when nobody writes, you know that your readers are deeply appreciative of your good work & good deeds!

    Take care. Peter & I look forward to the next HGSI workshop in Oct.

    Theresa H.

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