I have some passing thoughts on the financial sector (XLF) and some of the banks, both regional and large, as the year ends and we move into 2013. These thoughts include where a few stocks are going, some investment plays and short term income plays. Let's take a look.
Financial Sector as a Whole
A contrarian play on big banks would have paid off nicely for investors who have focused on the financial sector. Stocks have moved up nicely and the upward swing may not be over yet. As we slowly crawl out of our anemic economic slump, stable home prices, record low interest rates, and a rise in mortgage activity may propel the financial ETF higher. The move might be slow and we should take into account the continued slow economic recovery, because it could slow down the advancing value of single family homes.
Home mortgage business may increase, but the low interest rates and high unemployment will continue to challenge the profitability of XLF and its businesses. As long as the interest rate remains at or above 6.5% and inflation is below 2.5%, the Feds are committed to interest rates near zero. It's a vicious cycle - high unemployment suppresses borrowing and repayment rates. In turn, revenue growth can be hindered by the need for write downs.
Goldman Sachs Run
Up 40%+ year to date! Is it presently in a short term bounce or a long term trend again? Can the rally in GS continue and if so, for how long? The movement of the stock looks very good. The stock may be ready to come back with a vengeance next year. It has formed a double bottom (or 'W') pattern that tends to be very reliable. And it looks like it is about to begin its move up. The stock is above all its key moving averages. Volume has been high with many buyers accumulating shares on upswings.
A double bottom occurs when prices form two distinct lows on a chart. A double bottom is only complete, however, when prices rise above the high end of the point that formed the second low. The double bottom is a reversal pattern of a downward trend in a stock's price. The double bottom marks a downtrend in the process of becoming an uptrend. Double bottoms are often seen and are considered to be among the most common of the patterns. Because they seem to be so easy to identify, the double bottom should be approached with caution by the investor. The double bottom has a failure rate of 64%, which Bulkowski terms surprisingly high. If an investor waits for a valid breakout, however, the failure rate declines to 3%.
An Options Play
The stock is presently trading at 128.10 and I am looking at a bullish stock play on the company.
- Buy a January 2012 call with a strike of '130' (priced at $3.35)
- Net Debit to Start: $3.35
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Trade: 5 weeks
Reasoning behind the Trade
- XLF Sector is bullish
- "W" stock pattern looks like a breakout pattern taking place.
Wells Fargo May Have Peaked
Morgan Stanley downgrades Wells Fargo to equal weight. WFC also has less room to improve its expense ratio versus less efficient peers. We are below consensus on NIM, and expect further downside as securities portfolios re-price.
WFC has been on a bullish run since mid November when it staked out a support level of around 31.5. The present move has added about 10% to the stock's value as it stretches to reach the '35' marker. Can the stock continue to move up after the quick leap it made recently? A push through the upper Bollinger Band as far as the stock has moved, usually screams for a pullback before it continues to move up. As I observe the RSI, I am noticing that this huge move up in a short period of time did not push through the '70' over bought line. This is significant. It means the stock still has strength to move up. The MACD is widening and I believe this is common when the stock will now move sideways. With significant resistance at '36' I will be interested to see if the stock will be able to continue to move up.
Regional Banking Investments
Banks are better off than they were a few years back as they have embraced a more conservative lending approach and as the housing market expands, it could generate a better revenue base for banks. But as you know, things are not always rosy. Banks still have to face ongoing regulatory pressures as well as very tight interest rates. Consider an alternative to big banks - regional banking investments. Regional banks offer greater diversification benefits than do national banks because their performance is more closely attuned to the health of their local markets.