Don Dion, publisher of PowerShares Momentum Tracker noted that “The rally last week was sparked by an SEC emergency order cracking down on naked short selling, which came during the critical options expiration week.” The order was limited to nineteen firms, all investment banks plus Fannie Mae and Freddie Mac. The SEC recently amended the order to allow seventeen of the companies on the list, the investment banks, to continue short selling in a market making capacity.
“This rally is impressive,” Dion said, “but it appears to be just another bear rally.” Dion reminded subscribers that, “despite heightened share prices, financial companies do not really have a sunnier future than they had two weeks ago. The one benefit they can derive from the move is to act quickly and raise capital to mitigate the inevitable dilution of existing shareholders.”
PowerShares Momentum Tracker includes a number of ETFs in its fund universe that are based in the financial sector. Included on the Sector Momentum Table are PowerShares’ FTSE RAFI Financials (PRFF), Dynamic Banking (PJB) and Dynamic Financials (PFI). “While these financial-based ETFs saw a tremendous rally in price last week,” Dion noted, “they did not experience the same rise in terms of momentum.”
According to Dion’s July 24th Sector Momentum Table, PRFF, despite a recent boost in price from component Wachovia, remains in the 69th spot, which it has held since June 11. PJB and PFI, ranked 54th and 47th, respectively, were also unable to pick up momentum, despite the spate of good news.
Fidelity Independent Adviser’s PowerShares Momentum Tracker employs a momentum ranking system that uses the relative strength of each fund during a short-term period minus the relative strength during a longer-term period. The higher that the resulting figure is, the more short term momentum the fund has.
“The discrepancy between price movement and momentum position illustrates the crux of the banking problems,” Dion said. “Economically, the banking situation is unchanged,” Dion added, “while some banks reported better than expected earnings last week, the reports themselves were less than impressive.” Dion said that in his rankings, “the long term banking slump is outweighing the short term gains, so these ETFs aren’t seeing a momentum shift.”
Dion believes that technicalities, such as changes in the “charge off” period at Wells Fargo, allowed some banks to beat estimates but may not sustain the rally long term. “Hopefully (Wells Fargo) can use the extra time to work out these loans,” Dion said, “but if the economy deteriorates, they have only delayed their losses.”
About Fidelity Independent Adviser
With more than 100,000 subscribers in the United States and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Fidelity Independent Adviser provides a broad range of investors with Don Dion’s commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.
About Don Dion
In addition to his role as publisher, Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Massachusetts, Dion Money Management manages more than $700 million in assets for clients in 49 states and 11 countries. A licensed attorney in Massachusetts and Maine, Mr. Dion has more than 25 years’ experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.