Doug Kass has been discussing the banking sector recently and suggests that now is the time to buy a number of them such as Citibank (C) , Bank of America (BAC) , Wells Fargo (WFC) , etc. Doug's analysis is based primarily on fundamental factors such as their future earnings power.
While I question the ability of anyone to forecast what will happen to banks based on fundamental factors, I will admit that there is a very good likelihood that the group, along with most of the market, will be trading higher in the longer term. I'm not sure the banking sector will be a leader when we emerge from the current crisis but the group is sure to participant in the next bull market and will move higher.
The question that I am considering is whether now is the time to buy. I believe that with some effort that you can find good entry points with reduced risk. It is not a good idea simply to buy because the stocks look cheap right now. There is still substantial risk they could move lower if this economic crisis persists. Rather than worry about missing out on upside, it is better to worry about the downside. You need not buy at the exact low to have a good investment. In fact, trying to buy at the lows increases your risk of suboptimal entry.
The justification for buying a group like banks right now is that trying to time entries is impossible and that it doesn't much matter if you are a long term investor. I believe that with a few basic rules of technical analysis that you can make better buy decisions.
Currently all the banks are moving together and have the same chart which looks like the SPDR Select Sector Financial ETF (XLF) .
As you can see, the banks went into free fall at the end of February and finally hit a low on March 23. That was followed by a counter-trend bounce that failed. The stocks are all now in a trading range between recent highs and lows.
The goal should be to try to buy the stocks when they are most likely to be in position to produce sustained upside movement. That doesn't necessary correlate with their low point. Currently we need to see if they will hold the recent lows. There is high risk those levels will be tested as this bear market plays out. If they are tested and fail then we will then wait to see if a new support level is created.
Typically the best time to buy in a situation like this is when there are higher highs. A move over the $21.50 level on this chart would signal that momentum is building and the chances of more upside are good. If nothing else that level can serve as a stop out point for cutting risk.
If the market is close to a bottom then XLF should hold the March 23 low. Forget about trying to buy the lows and focus more on the support and resistance levels Those are the parameters that help you control risk. You can always buy back a stock you sold.
Given the current price pattern in the banks, I see no reason to rush to buy them at this point. If I was interested in the group, I would start with a small position and then watch the chart to see how the trading range is resolved. Typically it is safer to buy strength rather than weakness.
(Citigroup is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells C? Learn more now.)
