Best Days Are Behind the Financial Stocks

Folks are blaming Tuesday's decline on the consumer confidence number. So if the consumer isn't good, then why didn't the retailers break? Why did Oracle (ORCL Quote) dip to a new low, when last time I checked, Oracle doesn't sell its products directly to consumers? This is a search for excuses, the same way Monday's low-volume decline was blamed on vacations.

What struck me most about Tuesday's decline was how awful the statistics looked and how simultaneously stocks just seemed to dribble lower. There was no mad rush to sell stocks on the news. There was no panic. There was more volume than Monday, but still not much to make a fuss over. There was just a steady trickle lower. Tuesday's action might lead to a bounce Wednesday, but the same problems plague the market. Where's it going on the upside? The answer remains nowhere.

I mentioned Monday that the action in the New York Financial Index was bothersome; at that point, it was still holding the 600 level. In the past two days, however, this index has broken through that 600 level, to which it had managed to cling through every decline since May. Since mid-May, the yield on U.S. Treasuries has been steadily declining, yet the financial index couldn't seem to get going.

With this index now breaking 600, it left all that resistance overhead at that level, much like the charts of Microsoft (MSFT Quote), Best Buy (BBY Quote) and Dell (DELL Quote) mentioned in Tuesday's column. When a stock or a chart breaks, it rarely tends to collapse right away. Just like forming a bottom, forming a top is a process. If a bottom is formed by higher lows and higher highs, then a top is formed by lower highs and lower lows. The New York Financial Index, having failed to break out above its January high, already made a lower high, and now that it has broken 600, it made a lower low for the first time in three months.

Sure, it will bounce. Even Golden West Financial (GDW Quote) bounced in Tuesday's down market, but as with so many charts these days, the overhead resistance keeps getting in the way.

One relationship I watch is the ratio of the New York Financial Index to the S&P 500. Typically when we get over the 50% mark, the financials have seen the best they're going to see. On the chart below, you can see Point A, which was in October 1993, months before the Fed began raising rates and financial stocks began a period of underperformance. You can also see Point B, which was in early 1998, when the New York Stock Exchange advance/decline line topped out. We're currently at Point C, which doesn't bode well for the financial stocks.

This chart doesn't says, "Let's go out and sell financials today or else." It does say that the best days are behind these stocks. The chart of the New York Financial Index itself says it is in the process of forming a top.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.