Were Yesterday's Losses in Financials the Start of the Correction?

• Ian Wyatt
• On 1:45 pm EDT, Friday October 2, 2009

I bet we can all think of a better way to kick off the 4th quarter than a big 200 point drop for the Dow Industrials. We've all heard the bears declare the end is near for the Cash for Clunker Stock Rally. So, is this the end?

Looking around at the Clunker stocks, we they outperformed on the downside yesterday. Bank of America (NYSE:BAC) lost 4%, Citigroup (NYSE:C - News) dropped 6% and AIG (NYSE:AIG) fell 7%. Wells Fargo (NYSE:WFC) was down 5%.

CIT Group (NYSE:CIT) was hammered for 45% on Wednesday after it said bankruptcy is still a possibility for the troubled company.

Overall, the banking sector, as measured by the Financial Sector ETF (XLF), fell 4.6%. And the UltraShort Financials Inverse ETF rallied nearly 10% since Wednesday's close.

Of course, we might expect financials to bear the brunt of any selling. What about some of the other measures of economic health...like oil?

*****As measured by the US Oil Fund ETF (USO), oil prices have remained steady. Oil prices rallied from $66 earlier in the week. The fact that oil is still hovering around $70 a barrel as yesterday's sell-off raises questions about the strength of economic recovery is a positive sign.

Oil is one of the purest indicators for investor sentiment of what's to come for the US economy. We know inventory is rising, we know demand is down, and still prices for oil remain strong. Part of that strength is the weak US dollar for sure. But without expectations for rising demand based on a recovering economy, $70 a barrel simply doesn't make sense.

So until oil makes a determined drop lower, I can only consider the current weakness in stocks as a correction, a dip that will eventually be a buying opportunity. It's prudent to wait and see what oil does before entering any new positions, and we'll monitor oil closely here in Daily Profit.

*****New jobless claims hit 263,000 in September. Analysts were expecting the number to be 180,000. That's a pretty big miss and it's edging the unemployment to 9.8%, ever closer to double-digits. (I thought the Administration declared the recession over earlier this summer. Maybe they need to consult the numbers.)

America now has 15 million citizens on the unemployment list. And of course, we know that understates the true number because it excludes those whose unemployment benefits have run out, people who have simply stopped looking and people who are underemployed with part-time work that pays less than what they could potentially earn. In fact, it's been mentioned that the true un- and underemployment rate is more like 16% or 17%, no the "official" 9.7% advanced by Washington bureaucrats.

*****Gold has gotten back on investors' radar as prices have climbed toward $1,000 an ounce. We are currently seeing some strength in the US dollar as traders are moving money out of risky assets like stocks and into the safe haven of Treasury bills. Of course, the strength in the dollar is pressuring gold prices. But since any strength in the US dollar is likely to be temporary, this may be a good entry point for select gold mining stocks.

I just recommended a gold stock to my Top Stock Insights readers. It just raised $150 million to develop some under-explored property in Brazil that's got great potential for producing gold. You can get the details on this gold stock, plus 2 others we're closely monitoring for the right pricing, in the Special Report Gold Rush 2010: 3 Gold Stocks for Gold Over $1,000. You can get your copy HERE. 

Ian Wyatt is the founder of Business Financial Publishing and author of the book, "The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks." You can learn more about his book at http://www.smallcapbook.com, read his blog at http://www.IanWyatt.com, and follow him on Twitter at @IanWyatt.

Buzz up!