Financial stocks got hammered again on Thursday as renewed credit worries scared investors away from the sector.
Housing stocks, however, showed surprising strength, even with the growing problems in the subprime mortgage market.
Ironically, market strategists think the selloff in financials may be overdone, while the rebound in housing shares is overly optimistic.
Financial stocks, as measured by the exchange-traded fund XLF fell more than 3% on Thursday. The beaten-down sector is now down 7.6% year to date, even with a strong rebound the previous three sessions.
Quincy Krosby, chief invesment strategist at The Hartford Financial Services Group, said financial stocks may be in for further declines, but prices are starting to look increasingly attractive for institutional investors.
"You can't say today is the bottom -- this still has more to play out -- but you will see institutional buying if you haven't seen it already," she said. "The big diversified banks that offer a nice yield with a global reach are the ones you want to look at."
Among the losers, Goldman Sachs fell sharply on Thursday on reports that two hedge funds were suffereing losses. Goldman is now down more than 8% year to date. Meanwhile, Bear Stearns , which has shut down two hedge funds because of subprime losses, has declined 30% so far this year.
David Dropsey, equity research analyst at Thomson Financial, said subprime uncertainties continue to weigh on shares of investment banking firms, but the group could be poised for a rebound.
"One of the key drivers to the market is the fundamentals, and those remain strong for the investment banks," Dropsey said. "The companies that are oversold or unfairly taken down are going to revive the fastest."
"If the bull market of the last four years continues, this is the kind of industry you're looking for to outperform the rest of the market," Dropsey added.
Housing stocks were a different story on Thursday. Beazer Homes jumped 12% while shares of other homebuilders such as Toll Brothers and Hovnanian also saw big gains.
But market strategists think the sector is headed for another fall.
Michael Larson, real estate analyst with Weiss Research, said homebuilders were seeing strength due to expectations of a Fed rate cut, speculation that mortgage portfolio caps may be eased for mortgage financiers Fannie Mae and Freddie Mac , as well as short-covering in the beaten-down industry.
"It's a combination of those three factors," said Larson. "But it's just too early, I've lost count of how many false bottoms we've had in the stocks in the last two years."
"The inventories for new homes are sky-high and lenders are starting to play hardball, that raises the risk for those stocks so I would just stay out for now," he added. I don't think it's time for the individual investor to play hero. At best, they are dead money and at worst they have more downside to come."
"It's a disaster, not just down the road, right now -- everybody is sugar coating this and glossing over it," said Peter Schiff of Euro Pacific Capital. "The evidence points to a crash landing (in housing), it's a Hindenburg."
"We've been going on this unprecedented consumption binge and flooding the world with these worthless subprime mortgages and the world has been recycling their export earnings into our mortgage paper," he added. "Now they're finding out they aren’t worth the values that they think."
American International Group one of the country's largest mortgage lenders, said Thursday that mortgage defaults continue to rise. The company, which reported quarterly results earlier this week, said delinquencies among borrowers in the category just above subprime were increasing.
Bonds rose on Thursday and yields on the benchmark ten-year Treasury yield moved sharply lower as investors fled to safety.
Credit markets appeared to be on the upswing on Wednesday followingsales of investment-grade U.S. corporate bonds by a number of companies such as Merrill Lynch , Citigroup , Kraft Foods .
Still, debt offerings by U.S. corporations have declined 80% since last year when corporate America sold about $1 trillion in corporate bonds.
And though the overall stock market tumbled, some analysts remain optimistic.
"I don't think it's time for wholesale selling or a wholesale panic at all," said Harry Clark, president of Clark Capital Management. "If we pass the scare, which it is, equities will do very, very well."