Should You Be Buying Banks Right Now?

I finished up my article early this afternoon for this week's Tycoon Report and within minutes I got a request from the editor for a different article. Since I had an audition (for PETER PAN, for those of you interested), I didn't have time to attack it and, as it turns out, they went with my original article anyway. But they whet my appetite with the darn title question, above, so I came home and got sidetracked from more important things (like cleaning the house for my guests for tomorrow night, since I'll be working tomorrow day).

Lucky you.

Anyway, here are my thoughts.



Above is the list of Sector Hunter alerts for the Banks sector, the most recent being the March 19th 30% alert.

Now in the past I've cautioned against the 30% alerts, since the market has been too extreme. I liked playing the 70% sell signals, and many of you have made great money with the 10% buy signals (I know because you've told me -- by the way, feel free to leave a comment or a question at this post at any time, like Nathan did under "Tools for the Sector Hunter"; check it out -- thanks, Nathan!).

What's interesting here is that the sector has been on a Relative Strength Sell Signal since the July 14, 2008, alert at the bottom of the list above, and there was a Rotation Alert Issued on March 4th, when the 10% Buy Signal came out. However, the sector's relative strength did not shift to a Buy Signal. In fact, a Relative Strength Sell Signal alert came out the very same day, which cautions us to treat the position as a trade.

If you'd bought then, you'd have done well. Here's the Banks BPI as of today:



We can see that, if you'd missed the 10% signal and played the 30% signal, you'd still have made some money. (Caveat: The alternative securities in the 10% and 30% alerts were different, except for two ETFs.) I've highlighted the bottom support level and the resistance levels. Notice that the current 58% reading is at the last point of resistance. (The next resistance level is around 66%, from Aug 2005 to May 2006.)

So would I buy bank stocks now? If I were looking only at the BPI I would wait until that resistance was broken and the BPI shot higher. I would give up a little profit for the sake of a bit more certainty. And I'd keep an eye on the 66% level.

I would keep tight stop losses and cash out when I felt the profit was sufficient, because the sector's still on a Relative Strength Sell Signal.

Now, for something completely different, let's look at a weekly line chart of the BPI over the last ten years:



Ooohh!! Pretty colors!!!

Applying technical anaylsis to the BPI, I've highlighted in orange the areas that were historically above both the 100-day and 200-day moving averages, and the corresponding sections of the MACD below. (Okay, I missed one in late 2005 where it just poked out above the MAs, but you get my drift.) I've left the RSI for comparison for those of you interested in taking it furter (hint: color in the areas when the RSI breaks from below 50 to above 50 and stays there). The most recent two are labeled "July 18 - Sept. 19" (2008), and "Dec. 12 - Jan. 9", spans of two months and one month, respectively.

The most recent period, since March 20th, is colored in yellow. This three-month period is the longest run above these moving averages since the five-month period between October 8, 2004, to March 4, 2005.

The difference, however, is the sheer pitch of the recent angle upward, and the fact that the MACD has started a downward trend (paralleled by the RSI). Now the MACD could bounce, but I wouldn't hold my breath for that.

So "Would I Be Safe Buying Banks Right Now?"

Banks are still the unwanted child of the stock market and, until the credit crisis resolves itself, I can answer that question for myself:

I wouldn't bank on it.