A News-Driven Rally Doesn't Impress Me

The market rocketed higher Monday for the second straight session, sparked by the government's plan to bail out the troubled Citigroup (C - commentary - Cramer's Take). The financials were obviously leaders; the KBW Bank Index (BKX) was up almost 18%. That of course brought out the bottom-callers all over again because the leadership was in the financials. The only problem was that it was news-driven and not a rally ignited by fundamentals. If this had happened on a day with no news, then I would have been impressed.

News-driven rallies aren't what investors should be looking for; they should be looking for strong emerging sectors that are rallying from an improving fundamental outlook. Unfortunately, the fundamentals are not changing for the better in the financial world, and they're likely to get much worse. Investors may be excited about this government bailout for Citigroup, but it should stand as a sharp warning that we are only at the tip of the troubles in the financial system.

I have been warning investors to stay away from financials for more than a year and a half now, and if you have not listened or you are a new reader, I encourage you to take steps to protect yourself from further downside with the high possibility that this financial crisis is nowhere near an end.

I have said that the $700 billion bailout plan is a band-aid that will only amount to a temporary fix of an enormous problem. Now that Paulson has control of the money, he has completely changed his strategy midstream. My question is if they didn't know what they were doing when they requested the money, how do they know their new strategy will have any effect at all? The Fed has thrown everything it can at the financial market with its stimulus plans, printing money and interventions, and the credit markets continue to remain partially frozen.

I have continued to warn that the next shoe to drop is likely to be commercial real estate, credit card loans and even automobile loans. However, that doesn't even take into account the massive problem derivatives that continue to exist worldwide.

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At time of publication, Manning had no positions in the stocks mentioned, although holdings can change at any time.

Mark Manning, AAMS, is an Accredited Asset Management Specialist and Registered Investment Advisor with Butler, Wick & Co., where he specializes in wealth management. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Manning appreciates your feedback; click here to send him an email.