Should Traders Bet on the Banks?
News of greater global central bank cooperation helped send buyers into the market for financial stocks on Wednesday. Shares of banks from Citigroup (NYSE:C) to Wells Fargo (NYSE:WFC) climbed higher by more than 8% and 7% respectively. But while investors who have been long- suffering in these stocks are feeling some relief, are short-term traders readying themselves to send these bank stocks back from whence they came?
This is not the first time there has been significant strength in financials since they began trading in bear market territory in the spring of 2011. Many financials, especially the money center banks, made an impressive rally in June, shortly after dropping beneath their 200-day moving averages. Stocks like Citigroup, for example, rallied by more than 16% from its June low to its July high. Shares of Wells Fargo & Company gained well over 15% during much the same time period.
But what followed is what most traders and investors remember when they think of financial stocks in 2011: selling, selling and more selling. From those July highs, Citigroup fell by nearly 35% over the next month. Wells Fargo? A correction of more than 22%.
This is not to suggest that financial stocks, including Keycorp (NYSE:KEY), which added more than 4% in Wednesday’s trading, cannot continue to move higher. But what it does remind traders is that there has been an ample supply of sellers and short sellers waiting at the top of every rally in the financials since the spring. Should these stocks continue to drive deeper and deeper into overbought territory, then the return of those sellers will likely be tested – as will the resolve of those determined to buy these stocks despite their overbought status and “consider avoiding” ratings.
Heading into trading on Thursday, shares of Citigroup are the lowest rated of the three stocks in today’s report, earning only a 2 out of 10 rating. Both Wells Fargo and Keycorp fare little better, earning 3 out of 10 ratings after Wednesday’s session. With ratings like these, the likelihood of the money center bank stocks being available at lower prices in the near-term is significant.
All of the stocks in today’s report were available from research and data available through PowerRatings. To learn more, click here.
David Penn is Editor in Chief of TradingMarkets.com