Buy Banks Now... And Make 30% in Two Weeks
By Jeff Clark
July 10, 2008
This could be the start of something big.
Tuesday's rally was pivotal. A lot of analysts and television talking heads are calling it a "one-day wonder." And given yesterday's ugly decline, they may be right.
But I think the market has the potential for more than just a "one-day wonder." We could see a "two-week wonder" rally.
Let me explain...
Nearly all the conditions that existed when the market bottomed back in January, and then again in March, are in place right now. The market is deeply oversold. Investors are horribly pessimistic. And the financial sector is given up for dead.
Financial stocks bounced hard off the bottom in January and led the S&P to a 100-point gain over two weeks. In March, the financial sector once again forged the way higher. The S&P 500 rallied 140 points in six weeks.
Not surprisingly, financial stocks led the charge on Tuesday. And if history repeats, we could see the sector gain as much as 30% over the next few weeks.
Take a look at this chart of the bullish percent index for the financial sector (BPFINA)...
A bullish percent index charts the percentage of stocks in a sector trading in bullish formations. It ranges from zero to 100. Typically, anything more than 80 is overbought and anything less than 30 is oversold.
As you can see, the recent bottom at 10 is the lowest reading we've seen since the January low of 2 – which is just about as low as is mathematically possible.
Take a look at this 10-year chart of BPFINA... It shows just how rare it is for a bullish percent index to drop into the teens.
Before this year, we have to go back to early 2000 to find the last time BPFINA dropped below 20. Even during the worst of the 2001-2003 bear market, financial stocks were never this oversold.
Let's be clear... Financial stocks and the stock market will go lower before this bear market is over. But we're now seeing a lot of the same signs that led to a strong bounce in banking stocks in January and another rally in late March.
And if the financial stocks rally from here, the overall stock market will follow along.
Best regards and good trading,
Jeff Clark
