Financials Heading Into Support

Wednesday, January 27, 2010

The financial sector has been without trend for a full 6 months, consolidating in a sideways base. Last week saw the single largest volume day within this base as major banking stocks were hit after President Obama proposed some of his ideas for financial reform legislation. With the 200-day moving average rounding up and coming nearer to the current share price, enough time may have passed for stocks to resume their uptrend.

I have a long bias and believe anything below $14 will be a good buy in the long-term. I think significant earnings upsides for 2010 are still there for financials and especially the major firms and valuations are still attractive for the best of breed firms. Most major banks have repaid their TARP loans and continue to benefit from the steepest yield curve in decades. I see that yield curve only becoming steeper in the near term even if the Fed begins to tighten on the short end.

My only caution comes from the technical picture in the likes of JP Morgan and Goldman Sachs who saw drastic selling the last few days. These stocks may take a few weeks to recover from such a painful sell-off. So, I'm just dipping a toe, not doing a cannonball in yet.
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