Contributor Since 2010
By this time tomorrow, the markets will have the answer to the question they have been wondering about since earlier in the summer. A recent Bloomberg survey of investors revealed that 57% do not expect much of a reaction by the markets if the Fed reduces their bond buying by $10-15 billion.
Of the economists, the Wall Street Journal says that 66% do expect the Fed to start the tapering process today as they see enough improvement in the economic data to justify this action. Therefore, if the Fed does not begin the tapering process, some will conclude that the economy is actually weaker than most think.
For me, what really matters is the technical outlook for the stock market, which has improved further with this week's action. The A/D lines have broken resistance and started new uptrends, while the OBV has confirmed new market highs for both the Spyder Trust (SPY) as well as the S&P futures.
In Europe, stocks are trading higher, with the German Dax breaking out to new highs. In this environment, there are quite a few opinions about which sectors will do best. In yesterday's column, I examined three stocks in the top sectors.
The financial ETFs have had a good year with the Select Sector SPDR Financial (XLF) up 26.1% YTD, and the iShares US Financial Services ETF (IYG) gaining 26.9%. The PowerShares KBW Bank (KBWB) focuses on the big banks and has gained 27.5%. Is this the ETF for your portfolio or should you instead just buy one of the big banks?
Chart Analysis: The PowerShares KBW Bank (KBWB) has assets of $131 million and trades 178K per day. It just has 25 holdings, with over 30% in Citigroup Inc. (C), Bank of America (BAC), JP Morgan Chase (JPM) and Wells Fargo & Co. (WFC).
Bank of America (BAC) has been bumping into its downtrend, line e, over the past six days. The high for the month has been $14.68.
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Morgan Stanley (MS) closed above the August high at $28.02, line a, on September 10. It has been strong this week as the monthly projected resistance at $29.01 has been hit.
Wells Fargo & Company (WFC) last week came very close to the uptrend, line f, from the February and April lows as it dropped to $40.89.
What it Means: Of the three financial ETFs discussed earlier, the best YTD performer PowerShares KBW Bank (KBWB) looks the weakest technically. It is also the one that has the clearest concentration in the large money center banks.
Of these, Bank of America (BAC) and Morgan Stanley (MS) do look much better technically than Wells Fargo & Company (WFC). This reinforces the importance of being selective and how the better relative performance of a few stocks can be masked in an ETF.
How to Profit: For Bank of America (BAC), go 50% long at $14.36 and 50% long at $14.23, with a stop at $13.66 (risk of approx. 4.4%).
For Morgan Stanley (MS), go 50% long at $27.81 and 50% long at $27.25, with a stop at $25.93 (risk of approx. 5.8%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.