What a difference a week makes when you’re a financial stock! Or any stock, for that matter, that the market has given up on in the short-term, creating opportunities for short-term buyers of weakness in bull markets.
Consider Wells Fargo (NYSE: WFC). Shares of Wells Fargo began selling off a week ago, shortly after rallying to new, 52-week highs. Profit-taking in WFC acclerated quickly, and soon the stock had closed lower for three days in a row and was trading at its lowest closing level in two weeks.
Sellers had also managed to drive Wells Fargo into technically oversold territory for only the second time since the stock rallied back above the 200-day moving average in the second half of December. Then, a three-day pullback into technically oversold territory resulted in a strong rally and new, short-term highs. WFC closed higher for four out of six trading days, gaining more than 5%.
The recent March correction has been similar, with Wells Fargo closing lower for three days in a row and again earning a significant ratings upgrade to 7 out of 10 – the highest rating in our neutral category – on the same day it finished oversold. Buyers moved quickly, scrambling into the market for Wells Fargo – and other financials like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) – and sending the stock higher for three days in a row. From their oversold lows on Tuesday, shares of Wells Fargo are up more than five and a half percent three days later. Shares of Bank of America gained more than 4%. Shares of Citigroup are up 8%.
Traders who took advantage of the pullback in financials in general, using an exchange-traded fund to avoid single-stock risk, were also well-positioned for the sector’s snapback rally. Closing lower for three days in a row and oversold on Tuesday, the Financial Select Sector SPDRS ETF (NYSE: XLF) rallied by more than three and a half percent over the next three days. Leveraged ETF traders using funds like the ProShares Ultra Financial ETF (NYSE: UYG) were also able to get exposure to the weakness in financial stocks from a week ago.
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David Penn is Editor in Chief of TradingMarkets.com