Stock of the Week: Selling the Buying in Astoria Financial
If there has been one trading theme that has dominated the first half of the first trading month of the year, that theme is “buying banks.”
And while market pundits and prognosticators argued over the merits of a rally in a sector that most people had left for dead months ago, traders and active investors who remained focused on the data rather than the debating points were able to sell strength in the banks as stocks in that sector began roll over late last week.
Shares of Astoria Financial Corporation (NYSE: AF), a New York-area savings and loan, had rallied into overbought territory below the 200-day moving average shortly after the beginning of the year. The stock began earning “consider avoiding” ratings of 3 out of 10 or less in early January, and Astoria Financial’s short-term ratings only deteriorated from there. Two days later, shares of AF earned a 1 out of 10 rating, our lowest possible score for a stock, indicating that the likelihood of a near-term reversal in the stock had become very strong.
For traders looking to take advantage of stocks with these kind of “consider avoiding” ratings, a rating of 1 is often a powerful signal. As the chart below shows, traders who used an intraday entry strategy of as little as 3% to take a position above the market, were able to sell short and cover the position relatively quickly, buying back on weakness shares sold on strength just a few sessions ago.
Here, a 3% limit order above the closing level on the day the stock earned its “consider avoiding” rating of 1 out of 10 would have helped traders and active investors to a short-term gain of more than 3.5%.
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David Penn is Editor in Chief of TradingMarkets.com