The Rally in Financial Stocks Accelerates

The financial sector is continuing its strong uptrend today. It appears that many investors/traders/funds are reconsidering the positioning, balance sheets, and profit potential of many companies in this group. After the massive selloffs seen over the past 2 years, many financial stocks are coming off extremely low levels and have made huge gains since the March market bottom.

Currently, it looks as if the runup in banks, brokers, and many other financial-related companies is accelerating. There appears to be developing a buying near-panic which is turning almost parabolic in its nature -- somewhat the reverse of the panic selling we saw last year and early in 2009. This could also include shorts being squeezed. Another factor contributing to the runup may be large amounts of Call buying, which then causes Market Makers (who fill public option orders) to buy underlying stock to hedge their short Call positions.

Taking a look at the PHLX KBW Bank Index ($BKX), which is one of the older sector indexes, you can see on the Daily Chart below the current leg upswing, which began in mid-July, is accelerating. Don't fight a strong trend such as this, which looks to have more upside potential, although there may be sharp corrections in the near-term and volatility is picking up.

BKX Daily Chart


Certainly there is risk of a pullback/reversal when a trend gets as strong as we see in the above Daily Chart. However, if you look at the longer-term BKX Monthly Chart below, which covers 36 months of data, you can see that the current move is actually fairly insignificant when you consider the size of the drop. Even a 50% retracement from the old highs would be roughly another 10 points gain in this index, to the 60 area.

BKX Monthly Chart

Bottom line: Many financial-related stocks are on somewhat of a runaway accelerated uptrend. Certainly parabolic-type uptrends contain risk of a sharp pullback ... but the longer-term charts and power of the current momentum trend indicate further upside potential ahead over the coming weeks.

Disclosure - Moby Waller currently owns and/or has recommended long positions in various Financial-related individual stocks and options. Holding period of his trades and/or recommendations is usually less than 2 months.

Comments

[Mad Hedge F...:]

Lret me out of here! Welcome to the new bubble. In four months we have gone from 35% below the 200 day moving average to 15% above. It turns out that 1,000 in the S&P 500 is 38.2% recovery of the fall from the2007 peak, a great Fibonacci number. DeMark indicators are showing that buying power is getting exhausted. Daily sentiment indicators are 88%bullish. RSI’s and oscillators are over extended. Every day the buyers show up, marching in lockstep with military precision, to give us our needed spike up at the close to keep the rally alive on the charts one more day. Worst of all, I am getting deluged with emails from subscribers who, having stayed out all year, are asking if they should start buying now, and buying everything. All of this, and we still have the second half of the “W” to discount. If the American stock market was the only issue, I wouldn’t really care, since most of my longs are overseas. But if the US rolls over like the Bismarck, emerging markets,foreign currencies, commodities, the energies, and junk bonds will be dragged down with it, because everything is so interlinked these days.There will be no place to hide. I think the glass half full crowd is coming to the end of their run, so I would urge investors to pare down some risk. If your friends stay in, and they make a ton of money,that’s fine. Just let them buy the next round of drinks.

Aug 07 04:20 PM

[Tony Petroski:]

The Madman appears again. Buy my next round of drinks.

Aug 07 09:59 PM

[E Nuff Sed:]

Looks like a good ole fashioned buying panic!

Aug 07 11:32 PM

[john s. gordon:]

has feathers like a bubble, webbed feet like a bubble, quacks like a bubble.....
don't forget we have option ARM resets approaching, & lots of empty shopping malls, & consumers have no buying power,
> jack

Aug 08 08:39 AM

[Tack:]

The key point in your assessment is "value." Even after the recent gains, not even half the losses have been recovered. For some specific banks, especially the regionals, they're still selling at 25% of past highs.

As many are quick to measure the large-percentage gains (amplified by small base values) from a way oversold bottom, they lose sight of the fact that the gains were merely financials trying to return to some semblance of reality, not an increase representing a push to some new, stratospheric highs.

Also, too much emphasis is placed in "paper" valuations of debt assets. The "toxic" cliche has been overworked. Most of the debt held by banks is performing way above levels assigned to it by the manipulated mark-to-market world. As conditions improve, banks will be moving many reserves back into their earnings, which will boost performance even further than the also-improving operations.

And, throughout this war over paper valuations, banks have swimming in cash and cash flow, their cash flows and deposits increasing each and every quarter.

There will be continued volatility as the short-term debate rages on. However, in the estimation of this observer, the entire group remains undervalued, from a forward-looking perspective, and will yield excellent returns for the patient investor.

Aug 08 09:40 AM

[dixie:]

What we are witnessing is simply a resurrection of "good regional banks" that were oversold and thrown-out earlier with the proverbial bath water.

Seeking Alpha attracts many "chicken littles" that want us to believe that the sky is constantly ready to fall. 'Taint so. That's why God in His wisdom created day and night.

Aug 08 06:05 PM

[HChang:]

I had been looking to buy BAC at around $12, but was skeptical like most people. And watching Friday's surge, and giving a call to my broker after remembering some one told me "Don't Fight The Market", I decided to jump in BAC on Friday. The strong momentum will carry it to $25 to $30 in the next 6 months. Good luck..

Aug 09 02:20 AM

[paulbip:]

Federal regulators have seized 71 U.S. banks so far this year compared to 25 last year. You do the math.

Aug 09 10:58 PM