Friday, February 29, 2008

Gap through the trend

Last month I pointed out the gap through the trend on the financial ETF. This often signals a fundamental change in the market. Now a month later we can see that the financials are still locked in a downtrend. Today we have the potential for the SPY to gap through the trend line. If the gap holds and we close below the trend line today then the odds are probably on the side that this intermediate rally is done. This rally was born from the Fed cutting rates 125 basis points. So far no cuts have worked to support the market. Pure and simple we have two problems. The first one is spiking inflation especially energy costs. The rate cuts are just making this problem worse not better. The second problem is foreclosures in the real estate market are hurting the financial system. I think that in order to put in a bottom the market is going to have to see some kind of end in sight for this bleeding in the housing market. Unfortunately I don't think we are there yet. With a large supply of ARMs adjusting this year we could see another wave of stress in the real estate market. At this point it's probably to early to have an idea how big this foreclosure cycle is going to be. Until this uncertainty is clarified I believe we are still going to see stress in the financial sector.