Bank Stocks on the Move

As stocks scream higher in reaction to stronger economic news and the Fed’s $600 billion money printing announcement on Wednesday, one sector group in particular has been benefiting. And that’s financial stocks. Over the last two days, the sector group has moved up and out of the trading range that had kept a lid on prices since May. But now, with the group enjoying a flood of new money and showing improved relative strength against the broad market, the gains look set to continue. Why am I so confident? After the impressive performance of materials and technology stocks, new research from Credit Suisse shows that portfolio managers are now severely underweight the entire financial sector. Technology sector allocations among small cap funds are sitting at four year highs; while allocations for financial stocks are not far from mid-2008 lows. Bank stock allocations have already hit their 2008 crisis levels. That’s about to change: The Fed’s $600 billion QE2 money injection pushing up long-term interest rates and keeping short-term rates low, that’s the perfect recipe for higher ban profits via “net interest margin.” That’s because banks borrow cash at short-term rates (deposits) and lend at long-term rates (Treasury bonds, etc.). Of course, the economy is also improving. The October jobs report came in well ahead of expectations. Loan losses are on the decline — which helped list third quarter profitability for the sector. The foreclosure moratorium issue also appears to be fading. JPMorgan (NYSE: JPM ) executives told a meeting of bank analysts in Boston yesterday that while they have stopped foreclosures in 40 states, they expect to begin re-filing within a couple of weeks. The boost in profitability and the reduction of the earnings drag from loan losses and foreclosure moratoria is attracting new investor interest. Over the past three days, the Financial SPDR (NYSE: XLF ) has gained more than +3.8% relative to the broad market — its best performance since August 2009. Back then, the sector went on to gain a total of 21% over a three-month period before relative strength started to fall away again. The XLF is the easiest way to get exposure. If you are looking for more focused plays, a number of fast-moving bank stocks look ready for new investment. Candidates include Citigroup (NYSE: C ), Huntington Bancshares (NASDAQ: HBAN ) and Wells Fargo (NYSE: WFC ). Disclosure: The author does not own or control a position in any company mentioned. Be sure to check out Anthony Mirhaydari’s new investment advisory service, the Edge . A free trial has been extended to Investorplace.com readers. Log in with “freeuser” as the user name and “edge” as the password.
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