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MLR (Market Lab Report) - Is the weakness in financials a cause for concern?

The financials have been laggards throughout this market rally, and the recent foreclosure issues with major lenders such as BAC and JPM add further weakness to the whole group. It started 3 weeks ago when Ally Bank (formerly GMAC) stated it had potential problems with how its foreclosure paperwork was being processed as some lenders may not have foreclosed properly. Other major lenders then followed suit with similar announcements. Many foreclosures have now been halted, and 50 state attorney generals have launched investigations into the mortgage servicing industry.

The issue is that until this problem is cleared up, homebuyers could temporarily lose faith in the system of property ownership, which could depress sales, and thus home values.

That said, just because the financials are not leading, and are running into problems, is no reason to exit the general market on the long side unless and until the objective evidence shows otherwise. Financials topped out in early 2007, and the general market did not top until October 2007, so getting concerned about the market on the basis of what the financials did in early 2007 would not have helped you. The critical factor is how the leading groups are acting, not the lagging groups.


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