Financial ETFs are Looking Up, but for How Long?

Do certain things come in 3s? Let me serve up the following:

1. In Bernanke's testimony to Congress, he expressed a host of stagflation-like concerns; nevertheless, he expressed zero concern about the capitalization of banks.

2. The SEC may or may not have panicked with its afternoon decision on 7/15/08 to curb certain forms of short-selling on financial companies. Either way, short-sellers of financial companies immediately scampered, fearing the wrath of the regulatory body.

3. The biggest, brightest financial institutions aren't about to fold after all. Wells Fargo (WFC) beat earnings expectations and boosted its dividend; JP Morgan (JPM) also beat expectations.

It's no surprise, then, that financial ETFs across-the-spectrum have rallied in spectacular fashion. And while we've seen this "financials-have-bottomed" pattern before -- both in January and again in March -- what sort of faith should an investor put in the "happening?"

Regarding the primary 4 colors in the financial ETF world -- broker-dealers, insurance, regional banks, broad financial sector -- regional banks via the Dow Jones Regional Bank Fund (IAT) has spring-boarded the furthest. The 25% 2-day move is nothing less than "stratospheric."

At the time of this writing, the Select Financial Sector SPDR (XLF) had risen roughly 17.5% over the 2 days, the Dow Jones Broker Dealer Fund (IAI) had vaulted 15% and the Dow Jones Insurance Index Fund (IAK) had climbed roughly 7%. It would seem that, for the moment, traditional banks have the upper hand, and are carrying the broader index higher, while the move in the insurance segment is more subdued.

On further examination, of course, Insurance had fallen 37.5% from 2007 highs, whereas the others had fallen closer to 50%. Bear market math shows that both the the Select Financial Sector SPDR and the Dow Jones Regional Bank Fund  would need a 100% gain to recover. The Dow Jones Insurance Index Fund would need only 60% to get back to the gate. That definitely begs the question... which is better positioned for stagflation in 2008?

(Read more about investing in a "stagflationary" environment" here.)

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