By Kris Sayce, editor, Casey Daily Dispatch
Remember when bank stocks mattered?
Remember when everyone knew the names of the big banks’ CEOs?
It wasn’t so long ago.
Today, we’d wager that aside from JPMorgan’s (JPM) Jamie Dimon, most investors would struggle to name another.
It’s not surprising.
Banks and bankers went from being the supposed backbone of the world’s economy… to being too-big-to-fail pariahs… to also-rans.
The question any investor should ask right now is: despite all the bad news around financials, could now be just the time to buy?
Today, we take a closer look…
If this is your first time reading the Dispatch, welcome. If you’ve been here before, welcome back.
At the Dispatch we have two goals:
To introduce you to the most important investing themes of the day, and
To show you how to profit from them.
We do this by showcasing ideas from our in-house investing experts: Dave Forest and Nick Giambruno. And from the founder of our business, Doug Casey.
Let’s check out those banks to see if the sector is ripe for making a buck or two…
Financials Have Beaten Tech
We mention banks as the following news item from YahooFinance caught our eye yesterday:
As the U.S. economy continues to recover from the COVID-19 crisis, the nation’s largest banks are hoping for a robust bounce back in loan growth in the coming quarters.
In earnings reports covering the three months ended June 30, the four largest banks failed to substantially grow their loan books, instead turning to non-interest sources of income like investment banking to grow revenues.
At JPMorgan Chase (JPM) and Citigroup (C), loans were little changed compared to the same quarter last year. At Bank of America (BAC) and Wells Fargo (WFC), average loan and lease balances were down 11% and 12% respectively, compared to the same quarter last year.
Even zero percent interest rates couldn’t help banks grow their loan books.
Maybe that’s not surprising when unemployment surged… and when the government was handing out free money.
But regardless, over the past year, financials have actually performed well compared to the overall market. You can see this on the chart below:
The financials ETF – Financial Select Sector ETF Fund (XLF) – has gained 54%, compared to 39% for the Nasdaq index and 38% for the S&P 500.
So if you believe that it makes sense to buy the underperforming stock or index, and sell the overperforming stock or index, is now the right time to do that? Or will financials continue to outperform?
As always with questions like this, we turn to our colleague, technical analysis expert, Imre Gams for his take. Here’s what he told us yesterday…
Perfect Timing to Watch This Stock
It turns out, our question came at a perfect time… but with a warning:
Be careful! XLF is currently sitting at a very important junction.
What happens over the next few days will determine whether XLF must dip a little bit further before gearing up for its next bullish run.
Let me give you some background to explain what I mean. In May, XLF traded broadly sideways before breaking out. Regular Dispatch readers should know how significant this event is, as we’ve discussed this chart pattern before.
Indeed he has. Imre is referring to the sideways price action that often takes the shape of a triangle. If you recall, Imre has explained that triangles are one of the best technical patterns for traders.
Because once the price action bursts out of the triangle pattern, you can expect a sharp reversal in price.
Imre explained this further to your editor with the following chart:
Pay close attention to what happened to XLF after the price broke out of the triangle pattern in late May.
The real value of these crossovers is that they give us an indication of current momentum in the market.
Notice how after this bearish cross occurred, XLF tried to rally but failed at $37.13… just above the 50-day moving average.
This has resulted in the two moving averages now being almost flat. What happens next should set the tone for at least several days if not weeks.
This is where we get to the meat of the subject. Should you buy… not buy… sell… or even short-sell?
Well, right now, Imre says you should use a little patience… but perhaps not for long.
A Big Trade Setup Looms
The temptation with trading is the want or need to do something right now. But most often what sets the best traders apart from everyone else is the discipline to wait for the right moment.
So when will that be? Again, more from Imre:
If we break above the key resistance level of $37.13, then the 20-day moving average should follow the price action and cross back over the 50-day moving average. This would be a very bullish signal.
On the other hand, if XLF takes out key support at $35.69, then the bearish cross will still be in force, and we can expect further decline in this ETF.
Once XLF clears this current junction, then it will become possible to identify high-probability targets in either direction.
It’s an interesting setup. I’ll let you know once we get that decisive move.
So that’s the bottom line. A trade setup is looming, with a trade opportunity coming soon.
The ETF is right in the middle of the key support resistance lines. Some traders could use that as an opportunity to “trade the range.” But by doing that, you’re looking at much lower returns – assuming you even get the trades right.
Instead, we like the idea of bigger and higher probability returns.
The kind that we saw in May when XLF fell from around $38.50 to as low as $35. A trade opportunity isn’t far away. We’ll keep a close eye on it and report back as it develops.
Editor, Casey Daily Dispatch
P.S. As we put together today’s Dispatch on the financials ETF, we recalled the incredible investments Warren Buffett made in Bank of America (BAC) and Goldman Sachs (GS) in 2008.
Buffett struck a deal with these big banks that involved him making multibillion-dollar investments in both.
But rather than just buying each company’s stock, Buffett was much smarter. He used one of our favorite investment vehicles – warrants. That allowed him to make a much bigger return on his investment than if he had just bought the stock.
The good news for you is that deals like this are still available to investors (although not on those stocks). Colleague Dave Forest has selected the best of them. So far, his strategy has helped investors bag gains of 4,942%, 2,805%, and one position that is still open carrying a gain of 1,378%. For more details, go here.