Um, where or when is the bottom for financials.I guess they dropped on Monday due to the Goldman downgrade? From the top, around $38, XLF is down 43%. While 30% might be normal for the broad market during a bear phase, 43% doesn't seem like a lot for a down on its luck sector.
While not a prediction about financials, we know that tech (well tech as measured by the Nasdaq) dropped about 80% from it's peak.
I had trouble finding an index to be a proxy for energy but when energy went from 30% of the S&P 500 down to mid single digits in the early 1980's Exxon Mobil dropped from about $5.50 down to about $3.00; about 45%.
The thing here is that sector meltdowns, I mean real meltdowns, have come along every so often in the past and this will repeat in the future. The financials are, IMO, the easiest to spot...the curve distorts/inverts and trouble's a comin'. Another reliable tell is how big a sector grows to in the index. Tech was close to 30% at the top, energy too (as mentioned above) but I don't think 30% is necessarily a magic number, only because it doesn't happen very often, but this is worth following.
Five years ago, so before I started writing and long before the inversion, I was a tad underweight financials because of the slightly more than 20% weight for the sector. That, 20%, was just a little more than normal.
Energy has recently increased its weight (iShares has the energy weight for IVV at 15.15% but I thought it was more than that) in the S&P 500 but it is not necessarily problematic. If it gets above 20% I think that would be cause for concern and regardless of the fundamentals I would probably want to underweight. By underweight I mean 17 or 18% versus something like 22% but I would not let the weight grow to 26% in a 30% energy world.
6 comments:
Roger,
You talk about the inverted yield curve. What maturities do you look at? How inverted? Right now aren't long term rates higher than short term rates, meaning there is no inverted curve right now? I hope you can clarify "inverted."
Roger,
Are you describing an investment thesis? (You say "underweight", while I say "Short!")
Tying it to major fundamental signals (like the yield curve) makes it seem like something to backtest...
R
Rex Nutting believes that if Congree acts to reign in the speculators that gas prices could fall to around $2.00 a gallon as oil prices drop to around $65.00 - 75.00 a barrel.
He says that both Obama and McCain may favor this action. (Of course it is an election year)
http://tinyurl.com/6cdvpl
Roger,
Are you trying to outsmart the index ?
You mention: " I was a tad underweight financials because of the slightly more than 20% weight for the sector. " and with regard to energy: "Energy has recently increased its weight ... in the S&P 500 ... If it gets above 20% I think that would be cause for concern and regardless of the fundamentals I would probably want to underweight. "
So you´re a contrarian, the more a sector grows the less you own and viceversa. Your idea will not have many followers among people that believe in indexing and saving commisions.
anon 745, i care about how banks access money. if the curve is distorted it becomes harder or less profitable to do so.
anon 451, i have been writing about overweighting and underweighting sectors in great detail for almost four years. nothing new there.
You wonder where the bottom is on the XLF? It's at 13.61, for the short term, then a rally.
THE bottom will be in by fall of 2012: 4-6 dollar range.
Anyone thinking the high in the XLF will be taken out, or even challenged, are fooling themselves.
The financial are done for the baby boomers. Maybe in 50 years the XLF can take out it's all time high.
The banks are just starting to show cracks. Wait til fall of 2010, then the 'snowball' will really start to pick up speed.
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