The Debts of the Spenders: 50% of XLF Out on Loan to Short Sellers

Per late April. Of course things are probably a bit different now after a 2 week juncture.

DJ TECHNICALLY SPEAKING: Financials Seen At A Key Juncture

By Rob Curran
Of DOW JONES NEWSWIRES

The results of the government's stress tests hit the tape Thursday and may allow investors to identify the strongest and weakest of the banks. The Financial Select Sector SPDR (XLF), an exchange-traded fund that reflects the performance of the financial sector in the Standard & Poor's 500, has more than doubled since its bear-market low in early March. This is the latest in several sharp rallies since its peak in the summer of 2007. There's ample evidence that the latest rally was fueled in part by bears buying back their bets against the sector.

In late April, there were $2.42 billion worth of the XLF out on loan to short sellers, according to Mike Long, of Short Alert Research. That's almost half the value of outstanding shares of the ETF, Long estimated.

Intraday patterns also suggest that bears buying back bets has played a major role in the recent rally.

Credit Suisse is tracking the performance of a basket of stocks with a heavy short interest and comparing their performance to that of the S&P 500. On Monday, the S&P 500 gained 3.4% while the basket of short favorites rose 4.7%. That spread was wide enough to suggest a squeeze, particularly as the spread widened throughout the afternoon, suggesting a rush to cover.

The financial sector has consistently led market gains despite reports that the stress tests will result in dilutive capital raises for many banks. The only fundamental argument for the banks is that a budding improvement in the economy and the Federal Reserve's efforts to make lending and securitization viable will allow them to "earn their way out" of their solvency crisis, traders say.

"We are at a critical juncture technically," said Christian Bendixen, director of technical research at Bay Crest Partners.

The financial sector of the S&P 500 has reached a level on a 21-day "Relative Strength Index," a measure of short-term momentum, where "they have failed in the past since this bear market began."

Bendixen sees some technical signs that the financials will fail at this level again:

"Volume has been diminishing, and the rate of change, the speed of [financials] gains compared to the S&P 500 are not sustainable," Bendixen said.

Market-timing indicators suggest the financials are reaching an "exhaustion point," he said.

With the government assuring investors that it will prevent another major bank failure one way or the other, it's hard to see the crisis of confidence in the banking sector reaching the fever pitch of March again soon.