The Financial Sector Surges ... What's Next?
Thursday, August 13, 2009 | Price HeadleyThe financial sector continues to rally strongly, just after the Fed announced on Wednesday afternoon that it would not be changing its position on current rock-bottom short-term interest rates.
It appears that many investors and fund managers are reconsidering the positioning, balance sheets and profit potential of many financial stocks, including the banks and other mainstream financial firms in insurance and brokerage.
After the massive sell-offs seen during the past two years, many of these equities are coming off extremely low levels and have made huge percentage gains since the March market bottom. (Although, relative to where they were two years ago, there are a lot of further gains needed to get longer-term investors back close to where they were.)
How's This for a Change of Pace...
Currently, it looks as though the rally in banks, brokers and many other financial-related companies is accelerating. We are seeing a virtual buying panic, which is turning almost parabolic in its nature -- somewhat the reverse of the panic-selling we saw last year and early in 2009.
This could also be a function of the bearish short-sellers being squeezed. Another factor contributing to the run-up may be large amounts of call buying (bullish bets), which then causes market-makers (who execute public option orders to buy or sell) to buy the underlying stocks to hedge their call sales.
Don't fight a strong trend such as this, which looks to have more upside potential, although there may be sharp corrections in the near-term as volatility is picking up.
BKX Daily Chart
Certainly, there is risk of a pullback and reversal when a trend gets as strong as we have seen in the above daily chart. However, if you look at the longer-term BKX monthly chart below, which covers 36 months of data, you can see that the current move is actually fairly insignificant when you consider the size of the drop.
Even a 50% retracement from the old highs would be roughly another 10 points gain in this index, to the $60 area.
BKX Monthly Chart
Bottom line: Many financial-related stocks are on somewhat of a runaway accelerated uptrend. Certainly parabolic-type uptrends contain risk of a sharp pullback ... but the longer-term charts and power of the current momentum trend indicate further upside potential ahead over the coming weeks.
'Bank' Profits of Your Own as the Financials Make Money
As an Exchange-Traded Funds (ETF) options trader, there are also numerous ways to play this short-term uptrend, including not only BKX call options but also call options on the S&P Select Financial SPDR Fund (XLF).
And for those looking for bolder moves, there's the 2X leveraged ETF ProShares Ultra Financial (UYG) and the super-active short-term daytraders can even consider the Direxion Financial Bull 3X (FAS).
Just remember that these leveraged ETFs are meant to mimic the index two or three times over, for the day only. So, don't consider them for holding longer than one or two days at maximum.
I believe position traders (holding more than a few days) are better off focusing on options on the non-leveraged financial ETFs, as these options will be much more reasonably priced, and will not cause you to reach for the Pepto-Bismol on the first adverse tick!
It's important to fit your strategy to exactly the vehicle that best fits your trading personality and temperament.
Trade Well!
Rate his article here »
Price Headley
Founder
BigTrends.com
