The Master

If you are into technical analysis, good article on banks

Good Banks in an Ugly Market

Sector Alert

By MICHAEL KAHN  | MORE ARTICLES BY AUTHOR

Some banks have been rallying for weeks and are good candidates for purchase, Monday's market bloodbath notwithstanding.

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IT MIGHT SEEM LIKE A POOR TIME to be bullish on any bank stocks.

After all, with the surprise Monday afternoon defeat of federal legislation seeking to bail out struggling financial institutions, the Dow Jones Industrial Average was trading down about 777 points -- or 7% off its Friday close -- near the end of the trading day.

Even worse, the financial sector benchmark -- the Keefe, Bruyette & Woods bank index -- which was down as much as 13% Monday afternoon.

But the charts don't lie. Since the July low in the financial sector, there is a small army of component stocks -- from small local thrifts to regional financial services firms to the mega-institutions -- that have been in actual rising trends.

True, there are plenty of banking bombs just waiting for detonation. But the market is telling us which ones to avoid and which ones are worth the risk to own.

Using charts, which are built by the actions taken by the investing public, we can easily separate the good banks and thrifts from the bad. It is as simple as finding which ones are in rising trends, which ones are flat and which ones are still falling.

One favorite of mine is US Bancorp (ticker: USB) based solely on its stock performance over the past two months (See Chart 1). Since what can only be classified as a July selling panic as the stock fell sharply on huge volume, the stock has not only recovered but thrived. (That being said, it was off Monday about 7% in late-day trading, though that decline was half that of financials in general.)

Chart 1

Unlike many of its financial sector peers, this stock began a rally in the summer and has not looked back. Contrast that to the weaker stocks in the groups, which we will see below, that have fallen all the way back to their respective July lows. Investors were willing to hang on to shares of US Bancorp even as the sector and the market as a whole were stumbling.

US Bancorp is trading near its best levels of 2008 now and it sports a clear rising trend. A move above resistance at about 36.80 -- a multi-year high -- would signal victory for the bulls.

There are many similar charts in the sector and there is no secret in identifying them. A rising trend from July is the first clue. Bucking the market on days such as Monday when things look dreary is another. Wells Fargo (WFC) is an example of the latter as it battled its way into positive territory by lunchtime before succumbing to the overall market's selling pressure for a modest loss later.

Those are the good stocks. In the category of stocks seemingly about to check out of this world, we would have seen Washington Mutual (WM) before it formally failed and was gobbled up by JP Morgan. Its chart was heading lower for months without reprieve.

Wachovia (WB), the latest bank "failure" was also sporting such a decline and National City Corp(NCC) is looking similar. Just knowing the trend can keep investors from bottom fishing troubled stocks and making an expensive mistake.

Let's take a look at a bad chart without suggesting that the company is about to fail (see Chart 2). All we want to do is avoid a bad investment.

Chart 2

The Bank of New York Mellon (BK) remains in the declining trend that has been in place for months. In mid-September, it fell below its July lows unlike such strong stocks as JP Morgan. It was a classic chart divergence and our first clue that something was very wrong here.

Two weeks ago, the financial sector led a broad market advance on word that a federal bailout package was in the works. This stock, however, was not able to hold on to its own gains for more than a single day. And as of Monday's trading it has fallen below a support level on the charts as sellers get more aggressive.

Between the obvious falling and rising trends there are charts of stocks in limbo -- neither on the path to oblivion or the road to recovery. Northern Trust (NTRS) has been able to maintain a price floor -- with the September 18 panic low excepted -- at about 65 (see Chart 2).

Chart 3

At first blush, this is a rather bullish condition and a positive divergence with its peers. After all, if this stock found its 2008 lows way back in March and successfully tested them in July we can conclude that there is still demand for its shares.

However, this stock was also unable to hold on to its "bailout rally" gains from two weeks ago and is not much better off pricewise than it was in July. The chart gives us no reason to fear it but also no reason to think it has leadership potential at this point.

It is not a guarantee of anything but if given a choice between a stock that has been rallying in the face of the market's current adverse conditions and one that has not, I'd take the former.

This is not meant to forecast upcoming bank failures or analyze company health. Rather, it is focused on what stocks might be good risks for aggressive investors.

A little light chart reading is all it takes to find candidates for purchase. Run them through whatever filter you choose -- fundamental, quantitative, or anything else -- to narrow the list to those names that work for your risk tolerance and investing style.

My position in energy

Currently holding:

150 USO @ 80.95 13%

600 DIG @ 62.73  40%

630 DUG @ 38.42  26%

225 PBR @ 41.86    10%

300 CLR @ 34.46    11%

So i am 4:1 pro oil for now. If oil tests 110 area i will be cutting USO/DIG/PBR/CLR by half. That will put me at 58.7% pro oil and 41.3% no oil. If oil starts going down and i go -7% with my pro oil holdings then i will cut my pro oil holdings by 30% and that will put me at 65% pro oil and 35% no oil.I don't really know what i will do from here because i don't know what exactly is going to happen. My guess is that oil will rally til thursday on good news and find a good support around 100.   

hmmm

Apparently Hank Paulson contacted Warren Buffet to help him draw out a plan and they are voting for it on Thursday. This news will most likely trigger a big rally which will be a good time to play DDM. O ye Mel and Albert, Its a good time to buy some insurance for the shorts to sell it when the bear market rally ends(double profiting). I don't think insurance will be necessary for QID because NASNAQ is going to have a very hard time coming back after all the analyst downgrades(aapl 175 to 110). One more thing, I see the oil making a nice little rally at least up until Thursday.

herng the master

can i just say how totally right henry was about what just happened?

yeahhhhhhhhh

It was financials, now its oil

A lot of traders i know have been making handsome profits off of the financial crisis that has been doomed upon the market. The price fluctuation of the financial sector in general has been crazy. It not only has been going down drastically but also has been rocketing dramatically. Off of this price volatility many traders i know have profited tremendously. I personally was not able to profit too much off of the financial trend because i was too scared that i would get wiped out(as you may know several banks were wiped out. I only made 2 financial sector trade and that was with GS and AIG). Now i see a similar trend happening in the energy sector led by oil. I have seen the price of oil drop to $92 from the peak of $147 and rocketing back up to $122 and right now trading at $98.66. Dejavu? This trend is very similar to what has been going on in the financial sector the past couple months. If you think about it the reason why the financial sector behaved the way it did is because people were uncertain about the value of financial institution. Every little news on the financial sector moved the price of it. Now the market is not certain what the value of oil is because the global demand for oil is rather ambiguous. The uncertainty right now they have with oil is the demand. If the economy strengthens, the demand will be stronger and if the economy weakens, the demand will be weaker. As the market debates on this issue, the price flutuation has been and will be as crazy as the financial trend. I don't plan to miss this trend and my strategy to profit off of it is to trade DIG DUG USO(all funds) and Energy Sector stocks in gerneral.

also shorting....

NASDAQ(QID)- betting on the overall slowdown in tech

S&P500(SDS)- betting on the overall economic slowdown.

revise to my strategy

purchased DXD 1000@60.70
Purchased DDM(does the opposite of DXD) 500@56.17(insurance)

I am putting the insurance on because i can't predict the temporary market reaction when the bailout plan is revealed next week. There are several scenarios:

1.) no plan is passed by the congress = Dow will tank and i cash in with my DXD shares

2.) A plan is passed= Market reacts very well and the Dow climbs. Personally, i think if this scenario happens it will be temporary so i am doubling down on DXD if it drops anything below 7% and selling DDM when i think peak is near.

3.) A plan is passed = Market reacts poorly because some of the details of the plan will hurt Wall Street. Dow tanks and i cash in with DXD and maybe even add on to my position speculating that it will drop further.

4.) The worst case scenario: The bailout plan is amazing and it fixes everything very quickly and i lose a lot of money. At least i'll have some money back through DDM

p.s. if everything works out in the economy and i happen to lose i wil not be sad because there will be other opportunites due to the economic reversal. Another thing: i know i am betting against the market but this does not make me an asshole. I had some guy telling me i was not patriotic and i was like WTF. Nothing wrong with being a capitalist.

explaining gld play

$700 billion out of the U.S. treasury = weak dollar = gold goes up

SHORT SHORT SHORT

I have been selling off massively today on strength. I think the details of the bailout package will reaffirm the market that US is fucked for a while no matter how pretty the package turns out to be. I actually can't believe the market is actually rallying this hard on the news that a bailout package is near finish, its almost like blind faith. I am pretty confident that a massive market sell off is going to start sometime after the details of the package is out so i am going to make couple bets on this speculation. I am going to bet on DXD- etf that correspond to twice the inverse of the daily performance of the DOW Jones Industrial Average index. I am also going to bet on GLD- gold fund. I am going to wait and see which way the financial sector is headed and make big bets on certain institutions and go long with that. This is how i plan to play the market for a little while(very basic hedging strategy) and of course i am going to continue my day trading on the side(8 three digit swing days in nine trading session, so sick)