The Real Contrarian Trade: Sell Financials

By all accounts, beaten-down financial stocks are a contrarian's dream.

The S&P Financial sector is off 30% from its year-ago peak. Each day brings news of multi-billion-dollar writedowns, credit markets in disarray and balance sheets teetering on piles of quicksand capital. The housing market remains in free fall, and a growing consensus believes that a default-ridden, consumer-led recession has already begun.

In other words, there's lots of ugliness around, which can only mean two things: the bad news is in the price and, most likely, there's nobody left to sell. Unfortunately, investors who buy into this particular line of bullishness could be making a serious mistake.

For one thing, more than a few money managers are starting to say publicly that the bottom is in. History suggests, however, that such pronouncements are rarely as bullish as they seem, because genuine turning points tend to appear when everyone least expects them.

Yesterday, for example, Traxis Partners' Barton Biggs said on Bloomberg Television that equity markets were oversold and poised to rally, led by a rebound in banks and other financial shares.

And in a report published Sunday, "Bottom Fishers Nibble at Banks, Brokers," The Wall Street Journal noted that TPG-Axon's Dinakar Singh, Pzena Investment Management's Richard Pzena and Tobias Levkovich, chief U.S. strategist at Citigroup (C - commentary - Cramer's Take), had turned positive on the group.

But it isn't just the "smart money" that's been buying. So has the "little guy," who's usually not credited with getting in on the ground floor of a tradable rally.

According to Bloomberg,

Investors put $2.8 billion last month into U.S. mutual funds that concentrate investments in financial-services companies, the most since Emerging Portfolio Fund Research started compiling the data in 2004. ... The net new deposits pushed up assets in financial-services mutual and exchange-traded funds by 20% to $17 billion in January.

Other indicators also point to a surfeit of bullishness in a sector that is allegedly out of favor with the investment community.

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At the time of publication, Panzner had no positions in the stocks mentioned, although positions may change at any time.

Michael Panzner is a 25-year veteran of the global stock, bond and currency markets who has worked in New York and London for HSBC, Soros Funds, ABN Amro, Dresdner Bank and J.P. Morgan Chase. He is the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World, and is the publisher of the Financial Armageddon blog. Panzner is also a New York Institute of Finance faculty member. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Panzner appreciates your feedback; click here to send him an email.

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