Each time The Fed and the Feds try and save financials, it works in the short-term, but each time they have to get more and more creative and in the end keep printing money.
In January, we had the beginning of massive fed cuts...with 75 basis points on day after MLK Bday and another 50 a week later. That worked wonders on financial stocks.
In February, the govt passed the tax rebate, economic stimulus check bill...trying to spread dollars around that the government doesn't have. It helped the markets but not so much.
Then in March to salvage Bear Stearns they put the backstop financing on Bear Stearns and continued to cut rates, and unprecendently opened the discount window to primary dealers. That worked wonders again as many financial stocks ripped like there was no tomorrow.
Then we were fine in April and May...as the broad indexes reached a high for the year (or really close to it).
The came June and once it was realized that oil prices got too high and the fed couldn't cut no more...we had a jawdropping drop in financials...lead by Fannie and Freddie beginning to roll. The XLF drops below the March lows and keeps on falling.
Then July came along and the market panics. The Fed opens the discount window to Fannie and Freddie. Paulsen devises an emergency bailout plan for Fannie and Freddie which will cost 25 billion dollars for now. Indymac goes bust. SEC stops naked shorting on financial stocks, which then creates the mother of all short covering rallies. Financial stocks rip back to levels not seen since May and all is well. Very creative...when all fails, don't let traders short. I think SEC should do that for technology stocks too.
So come August and September when financials start dropping again...what can the govt pull out of its hat this time? Another stiumulus check bill? No question a bubble is emerging in financial stocks...no sector moves up that quickly and doesn't pullback hard.
Energy stocks are now looking like where financial stocks were two weeks ago. Chesapeake, XTO, Devon, Apache, Hess and Petrobras are being given up for dead. I think it's time to take profits on financial stocks, if you were smart enough to amass them, and move on to taking a shot at energy.
A sector with that much momentum over a long period of time (unlike financials which is now on Day 7) doesn't just rollover and die that quick. A few hurricanes, nigeria problems, iran problems, refinery problems, etc...can cause a quick snapback. Then everyone will once again run out of financials and take shelter in energy.
Based on after hours activity it looks like Financials will have another rally tomorrow and energy will fall further. But that would mean it's going on Day 8, which puts it in dangerous overextended zone.
