Why Financials Are Weak

A number of factors have been proposed to account for the weakness in financials today. Several traders have pointed to National Australia Bank, which on Friday revealed that exposure to the U.S. subprime market was forcing them to set aside an additional $805 million, and that it had now put aside enough provisions to assume a 90 percent loss in those mortgages.

That took some by surprise, but the edge had come off financials before that announcement. We saw a nice rally two weeks ago that took the financials up about 25 percent--until last Wednesday, when we simply ran out of steam. Since then, we have given back about 40 percent of those gains, with notable declines from the highs on Wednesday in Citi (down 20 percent), Merrill (down 32 percent), and AIG(down 18 percent).

Same with consumer discretionary stocks. We had a rally of about 10 percent in retailers, and even more for some home builders and auto stocks, in the same period, but since then given up half of those gains.

The conclusion: we had enough to take stocks financials and consumers off dramatically oversold levels, but not enough buying interest to lift them further.

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