FINANCIAL DOUBLE DIP?

The market continues to find resistance at the 1112 area on the S&P 500. Although I think we will eventually breakout and move up to around 1120, I'm not currently feeling like we will go much higher than that. Having said that, the trend over the last 9 months has been to avoid shorting the market at all cost. A result of that trend has been that many of my bearish predictions have not worked very well. I'm not discouraged because my job is not to predict the future...it is to trade the current trend...whether up or down. My experience tells me that I'll still get my big trades. I was shorting the market late in the summer of 2008. I was a bit frustrated because I was expecting a decline but the market kept chopping back and forth...even breaking above and below the 50 day MA. I suffered a draw down in my account as I was stopped out of many trades. Then came September. I made most of my money that year during those last few months as the markets collapsed. What caused me to remain bearish that year (besides the trend) was the collapse of Bear Stearns that happened in March of 2008. I knew it was probably the first domino to fall, but I didn't know when the others would start to go (I had been predicting a financial collapse as early as 2005). Now we are nearing the end of 2009. We've fully recovered from the financial collapse and the economy is back to normal...right? (I hope you caught the sarcasm in that statement). I say that sarcastically because that is what many would have you believe. I've felt very strongly since March that there are deeper problems with the financial institutions that we just don't know about. My nature is to ask questions about market news and commentary. I'm always asking myself "why". Why is this happening? Why are they telling me this news? Why is the news different from what the chart is telling me? Last year they talked about the credit markets freezing up...about banks not wanting to lend money. This didn't make sense to me. Banks are in the business of lending money...that is what they do! That is how they make more money. Why don't they want to lend more money? Well obviously, they don't want to lend money if they feel they won't get it back...especially if their reserves are not high enough to endure a run on the bank. In other words, they are a "house of cards" that is trying to look like a fortified castle until the economy turns around and bails them out...or in this case the U.S. government bailed them out. I found it very interesting that the banks didn't rally until the government eased the "marked to market" accounting rules. This allowed them to play with their numbers a bit and possibly make their current condition look better than it actually was. I was also suspicious when the government wouldn't let some banks pay back the TARP money early. When banks came out and said they wanted to pay back the TARP money early, I questioned whether they were saying that because they really could pay it back...or because they knew the government wouldn't let them pay it back early anyway so why not say it and make it appear that they were in good shape. Most of the rally in the financial stocks was due to the government assuring us that they were "too big to fail". So in a nutshell, I've had this lingering doubt about the recovery of the financial sector and thus the economy...especially since it has been fueled by borrowed money. Now the Dubai meltdown hits. Is this just an isolated case, or possibly the first domino of the second wave. We know that the banks will probably get hit with another wave of foreclosures starting around the second quarter of next year. As the S&P 500 reaches the 50% retracement of the 2007-2009 drop, the XLF (financial ETF) has barely retraced 30% of its drop. Some may look at that as an opportunity for more upside. I look at it as a divergence. Many financial stocks have moved below their 50 day moving averages and are starting to trend downward. I don't know what the market is going to do over the next few months. I hope it goes up...I love it when it goes up. But if it trends down, look at the financial sector as a starting point to buy puts. I love the current reward to risk positions on many of these financial stocks. JPM, C, BAC, and WFC. Even MS and GS are starting to roll over. Keep an eye on the price action. If you see days when good news comes out, but the stock goes down or is flat on heavier than normal volume...look out!