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Thursday, June 5, 2008

The Bank and Mortgage Index: Nothing But Trouble

The Bank Index (BKX, candles) has spent three consecutive days below the key support area of $75.00. While some kind of bounce into the $77.00 area is certainly possible, BKX should accelerate downwards now that a good number of banks are on deathwatch...

With MBIA and Ambac likely to give up the ghost now too, it is plausible that a few imprudent banks will get whacked for not having properly valued their now useless hedges with these firms.

The Mortgage Index (MFX) continues to tease critical support and looks set to break. Should MBIA and Ambac finally lose their ridiculous debt ratings, expect to see a negative reaction in Fannie Mae (FNM) and Freddie Mac (FRE). This would put the smack-down on MFX as FNM and FRE each carry a 10% weight in the index.

When the S&P500 (SPX, grey, area) rallied to 1440 both BKX and MFX underperformed massively. Now that that both are set to break down, expect the SPX to continue to follow thru on the downside as well.

The pressure of the declining 200, 50 and 20 day EMA's (green, red, blue lines) on the SPX is immense.

The Bulltards are likely to fail here.