Time to Fade the Financials?
Bank of America (NYSE: BAC). Up three days in a row. Overbought for the last two. Now down two in a row and more than 2% lower on Friday.
Citigroup (NYSE: C). Up six days in a row. Overbought for the last four sessions. Now down well over 2% on Friday.
And JP Morgan Chase (NYSE: JPM), which reported quarterly earnings Friday morning. Up three in a row. Overbought for the last two. Now also down more than 2% on the final trading day of the week.
The rally in financials has been the story of 2012, so far. And the next chapter in that tale will show us just how much money was spent chasing bank stocks higher over the past few days. With earnings announcements from Citigroup and Wells Fargo (NYSE: WFC) on Tuesday, US Bancorp (NYSE: USB) reporting Wednesday, and Bank of America scheduled to make their quarterly announcement on Thursday, there are plenty of catalysts for traders and investors alike who may be inclined to sell any news from this overbought sector, regardless of what that news is.
Traders who continue to focus on those banks pulling back in bull market territory should be in position to take maximum advantage of short-term weakness in this sector. These are the stocks that, historically speaking, have tended to respond most positively to short-term corrections. While stocks that are trading in bear market territory below their 200-day moving average often follow short-term weakness with additional weakness (consider the way the banks traded for most of 2011), stocks that are in longer-term uptrends have shown the ability to snapback from short-term setbacks, often climbing to new, short-term highs.
Some of these banks trading in bull market territory that may be worth watching on any continued selling include regional banks like State Street Corp (NYSE: STT), which pulled back by more than 1% in Friday’s sell-off in the financials, and even a money center bank like PNC Financial Services Group (NYSE: PNC). Shares of PNC slid by half a percent on Friday after closing higher for eight straight sessions, the last six in technically overbought territory.
One popular regional bank that is seeing continued buying interest is US Bancorp (NYSE: USB). The stock traded higher by 1% to close overbought for a third day in a row. Should profit-taking become the dominant theme in the financial stocks next week, USB is one likely source of new selling.
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David Penn is Editor in Chief of TradingMarkets.com