Overbought Conditions Catch Up with Banks, MS Drops 8%
Heading into trading on Thursday, shares of Citigroup (NYSE: C) have closed higher for seven out of the previous nine trading day. Two of the last three of those sessions ended in overbought territory.
Much the same was true of Morgan Stanley (NYSE: MS), which was also up for seven out of the past nine – the main difference being that Morgan Stanley finished overbought for three days in a row heading into Thursday’s session.
This was typical of the bank stocks, which had begun to advance toward levels at which buyers have historically tended to become sellers. For more than a week, the bank stocks – from American International Group (NYSE: AIG) to Zions Bancorporation (NASDAQ: ZION) – continued higher and higher as short-covering hedge funds and performance-chasing money managers drove the bank shares higher.
And on Thursday, the selling began.
Citigroup dropped by nearly 7% in Thursday’s session. Shares of Morgan Stanley finished lower by more than 8%. Money center banks. Investment houses. Insurers … the stocks that had led the markets higher, particularly the S&P 500, finally succumbed to the overbought conditions that had characterized the sector for days.
Traders who had taken positions in these stocks as the moved deeper into overbought territory will be covering positions over the next few days Given the fact that so many of these bank stocks have been trading below their 200-day moving average, there likely will be fewer buyers than there might be otherwise – save for these short-coverers.
To that end, traders looking to buy weakness in the sector may want to keep an eye on those financials pulling back in bull market territory. This includes regional banks like US Bancorp (NYSE: USB), which dropped by more than 2% on Thursday after rallying for four days in a row above the 200-day. It also includes stocks like Umpqua Holdings (NASDAQ: UMPQ), another regional bank, which sold off by more than 4%.
Ahead of Friday’s open, both USB and UMPQ have earned significant ratings upgrades, with Umpqua Holdings earning a two-point upgrade that takes the stock from “consider avoiding” to “neutral.” Additional selling in both stocks is likely to lead to further upgrades and higher ratings as early as the beginning of next week.
The stocks in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.
David Penn is Editor in Chief of TradingMarkets.com