Financial Stocks Are Threatening A Larger-Scale Breakdown

Morgan Stanley (MS) analysts have declared that the bottom is in, and the bear market has ended.

We have now come full circle: our market timing indicators are giving us a full house buy signal,” said the statement. “Each of the four indicators - valuation, capitulation, risk, fundamentals - tells us to buy.

The report goes on to say that their timing models are right 80-90% of the time (a number they pulled from you-know-where), but if they are wrong “the move the other way can be spectacular.” Nonetheless, they are recommending their clients buy stocks now. I am not clear whether this recommendation came out before or after the ten percent drop during the past two days.

A few interesting links that are relevant:

- Bespoke Investment Group reported today on the Default Risk for Key Financials, as defined by credit default swap prices. Who’s number one on the list? Morgan Stanley. Why? They made bad investment decisions. MS is followed by Goldman Sachs (GS), Merrill Lynch (MER), and Citigroup (C).
- Publica has a table with a “running tally of the banks that have announced preliminary approval by the Treasury Department for participation in the capital injection program.” Morgan Stanley is number five, with a total of $10 billion. Wells Fargo (WFC), JP Morgan (JPM), Citi, and Bank of America (BAC) each are receiving $25 billion.
- Bespoke, in an older post, has a graphic of Citigroup’s analyst ratings of Ford and GM, superimposed on stock price. It speaks for itself, check it out. And don’t trust Wall Street analysts. Except Meredith Whitney.

On a related note, I am considering buying MS puts tomorrow. Here’s the chart, in a clear downtrend:

The entire financial sector is looking very precarious, technically speaking. I bought Citigroup (C) puts this morning, which I am still holding. Today the price (just barely) made a new closing low on heavy volume.

Financials are threatening a larger-scale breakdown. Commodity stocks, which led the recent rally, are also looking weak. Moreover, the commodities themselves are in a bearish orientation, as Bonddad summarized yesterday in his Commodities Roundup. It is once again time to be very cautious with long positions.

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