Buying the Selling in the Banks
In closing lower for a third day in a row and pulling back by well over 3% to reach new, short-term lows ahead of trading on Friday, Wells Fargo & Company (NYSE: WFC) has made its first significant pullback since climbing back into bull market territory in mid-December. And with word that the Federal Reserve will remain accommodative into 2014, traders must be wondering how long the sale on banks like Wells Fargo and others such as US Bancorp (NYSE: USB) will last.
Shares of USB have pulled back for three out of the past four trading days and, like those of Wells Fargo, are trading in technically oversold territory as of Thursday’s close. The corrections in both stocks come as they retreat from significant highs – more than six-month highs in the case of Wells Fargo and 52-week highs in the case of US Bancorp. So some measure of profit-taking is to be expected. But if institutional buyers decide that they need to have some banks in their portfolios here in the opening rounds of 2012, it is hard to believe that financials like Wells Fargo and US Bancorp will escape their pursuit.
Heading into Friday’s session, WFC and USB both have neutral ratings of 6 out of 10. In terms of short-term edges, however, the advantage goes to Wells Fargo which has a positive edge nearly twice that of US Bancorp.
On a related note, another group that is moving lower in recent days and is often associated with the banks when it comes to compiling exchange-traded funds includes insurance companies like Allstate Corporation (NYSE: ALL) and Prudential Financial (NYSE: PRU). Shares of ALL have pulled back for four days in a row, while PRU has finished lower for three in a row including a sell-off of more than 3% on Thursday that took the stock into oversold territory.
ETF traders can take advantage of any continued weakness in financials through exchange-traded funds like the iShares Dow Jones U.S. Regional Banks Index Fund ETF (NYSE: IAT) and the KBW Regional Banking SPDRS ETF (NYSE: KRE). Direct exposure to insurance company stocks is available by way of the KBW Insurance SPDR ETF (NYSE: KIE) and the iShares Dow Jones U.S. Insurance Index Fund ETF (NYSE: IAK).
All four ETFs are trading above their 200-day moving averages. Arguably the most oversold is IAK, which has sold off for the past three consecutive sessions.
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David Penn is Editor in Chief of TradingMarkets.com