December 9th, 2010

The Resurrection of Financials

It’s not pleasant but take yourselves back to those dark, frightening, gloomy days of Winter 2009 when it looked like our financial world was coming to an end. Many bank stocks had imploded and were selling in single digits:

Perhaps the best depiction of the devastation caused to financial stocks is XLF, the group’s ETF:

From a high of 38.15 on Memorial Day 2007 to a low of 5.88 at the low on March 9, 2009, the ETF declined 85%. Were you among the few “gamblers” left who couldn’t pass up the opportunity of buying the American banking system at closeout prices? Don’t feel bad, few of us were.

As the market rebounded off the low in March, so too did the financials. Within 6 months, the ETF nearly tripled from those low distress prices and we were all kicking ourselves for lack of foresight and having missed what was a “once in a lifetime” opportunity.

But there were lingering doubts, concerns about a double-dip recession, continued high unemployment, additional rounds of Federal government and Fed stimulus, concerns about new banking regulations, tax uncertainties. Stocks, including the financials, may have bounced off the bottom but for over a year they have been mired in a horizontal trading range.

If the market does advance during the first half of next year to 1320 as I suggested earlier (see”Listen to One Opinion or the Sound of the Thundering Herd“) then it will only be able to do so if the financial stocks also make their move. Over thirty years ending in 2007, the financial services sector grew more rapidly than any other US industrial or service sector to became the largest US equity market sector representing 21% of the capitalized value of the S&P 500 Index; today, the sector represents 15% of the S&P 500 Index.

More and more pro’s are calling for a strong market next year. Byron Wein has been added to the list by saying yesterday on Bloomberg that “The index will extend the advance into 2011 and may reach its all-time high of 1,565.15 from October 2007”. If that happens then financials could turn from being the riskiest to one of the least risky industry groups to have some money invest.

(As subscribers to Instant Alerts know, I tipped my toe into those waters today and bought financial stocks for the first time in over three years in anticipation of and hopes for a substantial long-term …. 6-12 month …. appreciation.)

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  • Anonymous

    From the chart, do you see SPX may come down to test 100 DMA before move up?

  • Joe

    Anything is possible but I don't think testing the 100DMA is likely unless the market remains in this trading range until March, long enough in the future to allow the 100DMA rise to around 1200.

  • Anonymous
  • Joe

    Both look interesting but I like XLF better than IYR because XLF feels to be starting a move and IYR has been in an sustained uptrend for quite a while.

  • Anonymous

    What about FAS
    Thanks for your efforts !!!

  • Joe

    A small amount of FAS would be probably be excellent for adding some juice (volatility) to your portfolio. As a matter of fact, you get a 5-month (to April 21) at the money (27) call for about a 15% ((27+3.85)/26.81) premium over the closing price of 26.81.

  • Anonymous

    Guru, where do you see resistence for XLF? 16, 16.5

    KRE seems want to go to 28?

  • Joe

    Both levels seem reasonable first stops

  • Anonymous

    tyh have get through 45.5 to go up, do you add or reduce if breaking that line?

  • Joe

    A TYH cross above 45.5 would mean a buy to me.

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