On May 19th, I discussed what appeared to be a topping market. Since that time, the Dow has lost 8.82%. The S&P 500 has lost 7.51%. The NASDAQ has lost 4.86%. The SOX has lost 9.24%. The XLF (an ETF that tracks financials) has lost 16.67%. The bank index has lost 22.32%. The XLY (an ETF that tracks consumer discretionary stocks) has lost 10.65%. These are ONE MONTH returns, folks. The number that really jumps out though is the 22% loss in the bank index in one month. While the major indices appear to be heading to test March lows, the bank index has already blown right through those lows - see the chart below.
The technicals are suggesting that the news in coming months is only going to get worse, not better. Cutting dividends, raising capital and mounting losses are the three news items most closely associated with financials these days. Don't expect it to change anytime soon. Yes, the sector is very oversold so a bounce is quite likely in the near-term. However, shorts are likely to get aggressive again on any oversold bounce.
I don't believe we've seen a bottom in this downtrend yet. Negative sentiment is elevating, but we need extreme readings to mark a bottom. We have a Fed that has its hands tied, a struggling economy, and a teetering consumer. Lower equity prices will only exacerbate the problem. I maintain a positive outlook for equities over the long-term, but expect the short- to intermediate-term to be volatile at best. Take a look at the long-term chart of the NASDAQ to appreciate the possible short-term weakness in price while still remaining in its long-term uptrend.
I would remain cautious near-term.