In our last look at the banks, (“Are Morgan Stanley, Goldman Sachs Leading the Banks Lower?“)we wondered whether or not weakness in major financials like Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) was a hint that additional selling was likely. A week later, that question has been answered amply.
Basis the Financial Select Sector SPDRS ETF (NYSE: XLF), financials are on a five-day selling streak. XLF pulled back again on Tuesday, after a sell-off of more than two percent, finishing in technically oversold territory for four days in a row.
Are the banks any nearer now to a short-term bottom? Extreme conditions in financial funds like XLF – as well as weakness in the ProShares Ultra Financials ETF (NYSE: UYG) and the Direxion Daily Bull Financial 3x Shares (NYSE: FAS), which has a 2-period RSI of less than 2 – seem to suggest that a bounce over the next day or two is increasingly likely.
And if this is so, then traders and active investors may want to look to the earnings announcements of JP Morgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC) on Friday as potential catalysts for buyers to climb back into a very, very oversold market, and for sellers to relent.
Shares of JPM are certainly oversold enough to attract buyers. In addition to having closed lower for five days in a row as of Tuesday’s finish, JP Morgan Chase have earned “consider buying” ratings of 8 out of 10, and are set to open with a positive edge of more than one and a half percent when trading begins on Wednesday.
With a positive, short-term edge of over 1%, Wells Fargo is also likely to be seen by traders and active investors as a potential short-term buy given the stock’s current weakness. Shares of WFC, like JPM, have pulled back for five days in a row – including a retreat on Tuesday of one and a half percent – trading down to new, two-week lows for the last two sessions.
The current pullback in WFC is the stock’s most severe since it climbed back into bull market territory in the second half of December. The most significant previous sell-off, in early March, led to a rally during which Wells Fargo shares climbed for six out of seven sessions, adding more than 13%.
Wells Fargo has a 7 out of 10 rating as of Tuesday’s finish, trading just one point below out “consider buying” category.
With regard to the exchange-traded funds mentioned above, know that XLF, UYG, and FAS all have earned our highest, 10 out of 10, ratings. XLF has a short-term edge of more than two and a half percent. The positive edge in UYG is over six and a half percent in the short-term, while Direxion’s FAS has a short-term, positive edge of nearly 10%.
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David Penn is Editor in Chief of TradingMarkets.com