Wednesday, November 18, 2009

The New World Of Investing

In this new era where fundamentals seem to matter less and less, here is an ETF that seems to fit right in with that theme. It is the SPDR KBW Regional Banking (symbol: KRE) ETF.

It isn't lost on me that the local or Main Street economy is in the toilet. All I need to do is drive down the nearby 4 lane road with all the malls and strip centers to know that "things" aren't that good, and they are unlikely to improve any time soon. After all, how many tortilla restaurants and nail shops can one locale support? Who is going to fill all those empty stores?

Like all of you, I read about the increasing number of bank failures, the impending commercial real estate crisis, the high unemployment rate, and the increasing number of home foreclosures just to mention a few of our economic pleasantries. It would seem that none of this is good for the regional banks, who have been treated as pariahs as the Wall Street Money Center banks garner all the monetary stimulus from Washington. But when looking at the charts, the SPDR KBW Regional Banking ETF or KRE is the kind of equity that stands out.

Welcome to the new world of investing. The fundamentals are stinky, but the chart looks great. Maybe all those fundamentals are baked in to the cake?

Before looking at the charts, here is a CNBC video of banking analyst Meredith Whitney; the video is interesting in and of itself, but what caught my attention occurred just before the 5 minute mark when she spoke about last year's trade and this year's trade in the banking sector. (Thanks to Trader Mark at FundMyMutualFund for bringing the video to my attention.)

Last year's trade was to go long the Money Center Banks and short the Regional Banks, and in essence, that is how things shaped up as the big banks gained over 100% from the March lows and the Regional Banks only notched a 50% gain. Whitney now believes that the two sectors will converge although she does stop short in that she does not give an endorsement for the regional banks.

Another factor to consider is insider buying. According to InsiderScore, there has been "buying at battered Regional Banks and in other less glamorous pockets of the Financial sector," and this buying has been to an extreme. One caveat, however, is that financial company insiders timed their buys poorly in the recent bear market.

With this in mind, let's look at two charts!

Figure 1 is a weekly chart of KRE. Price is basing along the 40 week moving average, which is now turning up. A weekly close above the pivot low (at 21.08 and marked with blue up arrows) would be a positive, and this would also represent a close over 3 pivot low points, which I would also view positively. A weekly close over the trend line formed by two prior pivot highs (at 22.43) would likely catapult prices to the $30 level.

Figure 1. KRE/ weekly

As far as a stop loss goes, I would look at a monthly chart. See figure 2. I would use one of two things: 1) either a monthly close below the pivot high point at 20.86; or 2) a monthly close below the simple 10 month moving average.

Figure 2. KRE/ monthly

In sum, I like the Regional Banks and the KRE. It has been a relative under performer, and maybe some of that "hot" may rotate to this sector. Insider buying is a plus as well.

1 comment:

victorberry said...

Unless it's a case of apples and oranges, it appears the Elliott Wave folks have a different opinion on the future direction of regional banks (see commentary below). While you have more credibility (e.g., XLU) than the EW'ers (e.g., market turning point on 16-17 Nov 2009), I would be interested in hearing your rationale in rebuttal.

[Source ...]

Not so. Despite $13-plus TRILLION in bailout money, the main benchmark index for the U.S. banking sector -- the KBW Index -- is still more than 60% BELOW its 2007 peak. Further more, on page seven of the November 2009 Elliott Wave Financial Forecast (EWFF, for short), our analysts present a labeled close-up of the KBW that shows a major, trend-changing event underway. In EWFF's words:
"The Index violated a [key] trendline, confirming the start of a major leg... this is a strong signal" that the credit crisis is not yet over.