Weekend Wrap-up: Wow-wee, this market can't be stopped! The small correction we had for the first three days of this week was quickly extinguished by the bulls who are refusing to let the bears take control. Today we saw follow-through to yesterday's rally with the S&P, Dow Industrials, and Russell 2000 breaking out to new all-time highs. The burning question remains: Can this rally last?
If history is any indication, 82% of the time the market has rallied the last two months of the year (since 1928). Them's pretty good odds it will happen again this year but there are a few things to consider before plunging headlong into the bull run. The first is that the market is becoming richly valued. Yes, there are a few places where value can still be had (see below for one area) but they are getting harder and harder to find. The historical mean P/E (price to earnings) for the S&P is 15.5. Currently, that value stands at 19.8--more than 25% above the mean. While this number isn't that extreme, it is definitely on the high side. The second reason is that technically the market is overbought. This year, the market has rallied five times before correcting and each time it was 9% to 13% above its 200 dma before it corrected. As of today's close, the S&P is 10% above its 200 dma placing it smack dab in the correction zone. Of course, the market can rally more but each day of gains brings us that much closer to the precipice. Any hint that the economy is in trouble--say, disappointing Black Friday sales figures?--could just be the straw that breaks the camel's back.
Regional banks are still attractively valued
Many months ago we noted how regional banks, which had been badly beaten down, were beginning to attract the attention of investors. Since then, share prices have been rising steadily pushing the bank and regional bank etfs (IAT, KRE, KBE) to new highs. Leading the charge among the regional banks are the following: First Merchant (FRME, $20.35), BBCN Bancorp (BBCN, $16.29), Hancock Holdings (HBHC, $34.40), and Wilshire Bancorp (WIBC, $9.89).Although all of these have enjoyed a substantial increase in share price, they are still reasonably valued at 14 to 16 times earnings. Leaders that are higher up the P/E scale (17 - 23) yet still attractively valued are the following: First Midwest (FMBI, $17.78), MB Financial (MBFI, $31.60), Bank of the Ozarks (OZRK, $53.53), and Sterling Financial (STSA, $31.63). On a purely technical basis, Bank of the Ozarks sports the most attractive chart and is the second lowest beta name of all the above mentioned stocks. A stock with a low beta is good if you're concerned about price volatility. On the flip side, this issue is also the one with the highest P/E. In conclusion, if you still wish to take part in the Santa rally, the regional banks offer solid value with a dividend kicker (1-3% yields on the above names).