Are Banks Really a Good Trade Here?

It may surprise some investors to know that one of the best-performing sectors during the last leg of this banking crisis was ... you guessed it, the banking stocks. The banking sector as a whole has outperformed the broader market on a comparative relative basis since the summer. But is it too late to get in? And if so how do you do so? Let's take a closer look.

The financial stocks have been moving down since the beginning of 2007 as the financial crisis has unwound. The banking sector appears to have exhausted itself to the downside in July and the group has failed to make a new low since then, despite the crash in the broader equities market.

Retail HOLDRs

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While we understand that major problems persist, we believe the banking crisis may have peaked and the credit market freeze appears to be loosening at this time. It may be time to venture back into the banking stocks on a selective basis.

The banks that managed to avoid the subprime mess stick out noticeably in this environment. A quick scan of the banking sector will reveal several charts which have failed to break down, and even appear to be thriving in this environment. The reason is that many regional banks maintained old-fashioned conservative banking practices and they managed to avoid the entire mess. These banks are now positioned to benefit enormously in the current environment.

The Fed is creating a "nurturing" environment for the financial system so that the wounded banks can recover and survive. If you managed your bank correctly and avoided disaster, your bank is now benefiting from extremely wide lending spreads and cheap money.

At the same time, your competitors are retrenched and refusing to lend to creditworthy customers. The business environment couldn't be better for institutions in a strong capital position.

TFS Financial

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One bank that traders may want to consider is TFS Financial (TSFL - commentary - Cramer's Take). TSFL is a Cleveland-based mutual holding company. The bank managed to navigate its way through the current financial crisis by avoiding risky loans and staying clear of derivative products. Basically the bank stuck to basic, conservative lending practices.

TFSL has excess capital which the bank has been using to buy back its own stock. Technically, TFSL is one of the few charts that solid and looks poised to break out of a large consolidation-base formation. It has been consolidating between $12.75 and $10.75 since last year. We are now seeing a bullish consolidation forming in the chart, and we believe that TFSL is poised to make a breakout move to the upside. A breakout over $13.50 would confirm that the bulls are in charge, and the stock is on the offensive. A failure back below $11.50 would suggest that the stock wasn't ready to hold the breakout and trend. We would use the $11.50 level as a stop-loss.

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At the time of publication, John Hughes and Scott Maragioglio were long TSF Financial. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.