The resumption of selling in US stocks across the board, but especially among the financials, will likely encourage another round of hand-wringing and doomsaying from the usual quarters. But while it is true that the recent, two-day bounce in stocks on Wednesday and Thursday came more as a response to oversold extremes than anything else, it is also true that additional weakness in stocks – especially those stocks still trading in bull market territory – may be a blessing rather than a curse for traders and investors alike.
With stocks overdue for a correction ever since rallying from the lows of late November, those hoping for higher stock prices should appreciate any time the market takes to let a little steam out of the rally. A “hockey stick” move higher in the market does few traders and investors any good over the long run, and a much more gradual ascent allows for not just more potential, overall participation by traders and investors, but for higher quality participation, as well.
As of the second half of trading on Friday, none of the major financials have returned to oversold levels. This is true even as the positive edges in stocks like Goldman Sachs (NYSE: GS) and Bank of New York Mellon (NYSE: BK) climb above or near 1%. And with neutral ratings still characterizing financials from Bank of America (NYSE: BAC), which pulled back by more than 5% on Friday, to Zions Bancorporation (NYSE: ZION), which finished lower by nearly 3%, there is every reason to believe that these stocks are capable of continuing to sell off until more oversold levels are reached.
In the meanwhile, traders and active investors may want to keep an eye on the Financial Select Sector SPDRS ETF (NYSE: XLF). Trading lower on Friday, the fund has not yet returned to technically oversold levels, has neutral ratings and a positive edge of just under three quarters of a percent. Any weakness in the financials will appear here and depending on the nature of the selling and the individual stocks affected, it is possible that the XLF will return to technically oversold territory before many of the individual stocks do.
An example of this is the pullback into oversold territory by the KBW Regional Banking SPDR ETF (NYSE: KRE). Down more than two and a three-quarters of a percent in Friday’s trading, KRE has now closed lower for five out of the last seven days, and earned a positive edge in the short-term of almost 1%. KRE is the most oversold of the major financial ETFs; in fact, it is the only one that is technically oversold while others – from XLF to the ProShares Ultra Financial ETF (NYSE: UYG) – continue to trade in neutral territory despite recent weakness.
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David Penn is Editor in Chief of TradingMarkets.com