Banking on the Crowd Being Wrong
Stockscores.com Perspectives for the week ending September 26, 2008
|
| Upcoming Events |
Stockscores Tour Dates
DisnatDirect presents the StockScores Canadian Tour for Fall 2008.
Victoria
Vancouver
Edmonton
Calgary
Toronto
Ottawa
You are invited to hear Stockscores founder Tyler Bollhorn speak on his trading methods and how you can use the tools and education found on Stockscores to improve your own trading. Plus, you will have the opportunity to open a brokerage account with DisnatDirect and take advantage of the free StockSchool Pro offer.
For locations, details and to register for these free events, Click Here
|
| Get the StockSchool Pro Free |
DisnatDirect named the number one Canadian brokerage for Traders by Surviscor! Open and Fund a brokerage account with DisnatDirect and receive the StockSchool Pro home study course free, including special Pro level access through the DisnatDirect client website. Offer only available to Canadian residents. For information, click here
|
|
In this week's issue:
What would you say if I told you that now is a good time to buy US banking stocks? Unless you have been living under a rock, you would probably suggest I seek out a padded room and bed down for a few nights until I find my sanity. Friday, Washington Mutual (WM) was added to the list of Financial sector failures that now includes Lehman Brothers, Bear Stearns, Merrill Lynch, Fannie May, Freddie Mac and AIG. A rational person would say that now is really not a good time to buy banking stocks, which one is going to disappear next?
However, when I look at the charts of the major US sectors, the Banking group appears the most promising. And it is this disconnect between the perception of the masses and the actions of the market professionals that explains why most investors fail to beat the market.
Most of us watch, read and listen to the mainstream media. Our opinions are shaped by those that have brand recognition. Oprah has a bigger brand than Rikki Lake and so we as a society tend to place more trust in what Oprah has to say. The media tend to react to information, seeking to explain what and why things are happening as they are.
The problem is that most investors think, whether consciously or not, that the stock market is priced based on what has happened when prices are actually changing based on what investors expect will happen. We know the banking system is in crisis; that is why the Banking sector fell over 50% from its July 2007 price level. But now, as the US Government considers purchasing the problem mortgage assets from banks, it may be that the trend for banks is set to turn.
I want to stress that I have very little understanding of the banking sector and really do not know if the system will be saved by an infusion of $700 billion. But I know that there are very smart, experience people at the major investment funds around the world that do understand this stuff and who do the hard work to figure out what future values will be. It is they who I trust, or more concisely, it is their actions that I trust.
The chart of the Dow Jones Banking Sector, .DJUSBK, broke its downward trend one week ago. It did so from a rising bottom (a sign of optimism) and with abnormal volume. From my experience, that tells me that this sector has a 75% chance of bottoming here.
I can not say the same for the Insurance sector, the Tire sector or the Travel and Tourism sector. In fact, the majority of major market groups appear weak and likely to get weaker, an indication that the expectation is for a continued economic slow down that will hurt corporate earnings.
But for the banking sector, which has seen unprecedented losses in the value of their stocks already, it appears that the worst has been priced in. The turnaround is not certain but it is probable. And that is what we traders look to exploit. To be successful, we have to do so ahead of the crowd.
An important thing that I have learned is that sometimes the best opportunities come from doing what is hardest. Going against the crowd when everyone is negative can lead to explosive gains, so long as you time it right. The chart helps us do that.
A quick reminder that my speaking tour begins next week in Victoria and Vancouver. I will be doing a new presentation called The Four Pillars of the Stockscores Approach, looking at the concepts behind when to enter, how to manage risk, when to exit and how to manage emotions. DisnatDirect is the sponsor so these events are free, just register please on the Upcoming Events page on Stockscores.
Back To Top
So, how do you trade a turnaround in the US Banking sector? You could trade the individual banking stocks, but that is not something I am fond of because there is too much risk that one name could go under. Pick the wrong Bank and you could lose a lot of loot.
Instead, take advantage of the diversity that is inherent in the Exchange Traded Funds. Below are two to consider. But absolutely keep in mind; this trade, like all others is not a certain winner. I think it is a probable winner, but if the market changes its opinion and this sector breaks below support, get out and call it a loss before the small loss turns in to a big one.
Back To Top
1. XLF
The XLF is the Financial SPDR fund, a basket of Financial stocks. Its chart does not show the break of the downward trend that I found with the Banking index because this ETF is not made up purely of Banking stocks. But it has made a double bottom and is really flirting with that downward trend line. Support at $17.
Back To Top
2. UYG
The UYG is the Ultra Financials Pro Shares, a fund that is leveraged to move at about twice the pace of the underlying index. Basically, it gives you more bang for your buck, but it also has more downside risk. But, to get the same amount of dollar risk on the trade (the distance down to support) you can buy a smaller position which should appeal to many investors. While the XLF moved up 3% on Friday, this fund moved up 5.7%. Support on UYG is at $14.40.
Back To Top
References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
Back To Top
|
