In the March 2010 INM (see INM Archives) article, a lack of conviction in the stock market was attributed to some very big questions that remain unanswered about the future.  As we pondered "instabilities the global markets might face" in the wake of various countries' difficulties in staying solvent then, a short-lived rally soon followed.  The confirmed rally generated some excitement and some bullish action among several high-ranked leaders. However, that upswing has been followed by another downswing, and we are seeing more worrisome signs that the market may be getting into trouble accompanying the latest "correction" in the major averages. Concerns have been raised because of the weakness in financial stocks over the past month or more. 

If two bear markets with approximately -50% corrections in the span of one decade did not teach investors respect for market volatility, maybe nothing will. Ten years have flown by since the first issue of "Investing for the New Millennium" was published in June of 2000.  During that period I have done my best to help investors be spared painful financial setbacks during market downswings, and make the most of the upswings. Longtime readers know the great respect that is given to the financial group as a "leading indicator", and at this point it should be clear to all that we place great significance on the Bank Index and Broker/Dealer Index action.  While acknowledging that those important indexes turned downward months before the broader market averages turned down in 2007, this helps explain why we are paying especially close attention right now to the near-term action in financial stocks.

Technically, concerns increase whenever the major averages sink below their 50-day moving average (DMA) lines, so the May 5th violation of the benchmark S&P 500 Index's 50 DMA line alerted investors to be on their guard (read here). That actually followed an annotated graph as the NYSE Composite Index suffered a 50-day moving average (DMA) line violation and slumped under prior chart highs. After the market close on May 4th, the headline above the market commentary announced - "Damaging Distribution Day; NYSE Composite Index Breaks 50-Day Average" while the Broker/Dealer Index's loss led to the first close below its 50-day moving average line since early March (read here). That the "flash crash" including a 1,000 point intra-day Dow plunge occurred on May 6th should not be overlooked by chart-readers, as one might suggest that amateurs and professionals surely spotted those recent technical signals which prompted action. Taking the appropriate action on a case-by-case basis with your stocks prompts investors to raise cash when any holdings start getting into the trouble zone. A reminder was added to many Featured Stocks' notes on 5/04/10 - "Broader market action (M criteria) is normally expected to impact 3 out of 4 stocks, and widespread losses are adding to concerns about the current rally's tenacity.  Trade accordingly."

Not every stock falls when the market goes into a correction, but most of them fall. However, we are not suggesting a long-term commitment to a bearish stance. You can optimistically say that the next new confirmed rally could always be just 4 days away. But when the market is in a correction you, in the meanwhile, never know how far it will continue falling. Taking action on a case by case basis allows investors with a small number of stock holdings to reduce their investment exposure during a market correction.  Raising cash during a downswing is crucial to preserving your precious equity.

Turning our attention deeper into what is happening with financial stocks right now, my regular readers know there are the two big financial indexes which I constantly follow. There are 7 separate Bank groups, 16 different Finance groups, and 5 different Insurance groups among the 197 Industry Groups the newspaper cites. This will try to keep it simple.

PICTURED 1: The 3-year chart of the Bank Index shows that it has thus far survived the first test of its 200-day moving average (DMA) line since rallying above it in July 2009.  It spent months consolidating below its 50 DMA line in late 2009, so it is not alarming to see it below its 50 DMA line now. Deterioration below its recent lows and 200 DMA line would raise greater concerns for it and hurt the broader market's outlook. We will be watching this closely.  A downturn below its 200 DMA line in 2007 preceded its much longer and deeper losses as financial stocks led the major averages' downward plunge through 2008 and until the March 2009 bottom.