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Top Bank Stocks for 2011

WINDERMERE, Fla. (Stockpickr) -- I have to come clean: I really dislike the banking and financial sector. It's not personal -- it's just that my market discipline is that of a trend follower, and the banking complex has been a horrible place to be in 2010.

That might be about to change, though, and being a dedicated trend follower I have to recognize this possibility and set aside my emotions and bias. This is why it's so crucial as a trend follower not to develop an opinion that keeps you out of a moneymaking opportunity. If a sector that I can't stand looks like it wants to go higher, then I should act on the behavior of the stocks and not off of any preconceived notions.

There are a couple of things to understand about what's going on in the financial sector right now. First of all, the group is completely hated and despised. There are rumors that WikiLeaks could be set to release some damaging information on Bank of America (BAC) and possibly other companies. These rumors are creating a wall of worry for the banking stocks.

Related: 2011 Stock Predictions and Outlook

We also now have Meredith Whitney saying that 50 to 100 municipalities are at risk for defaults. Of course, it's impossible for that to happen without impacting the financial sector.

I have no idea if either of these potential events will come to fruition. What I do know is that a number of the stocks in these key sectors are ridiculously beaten-down and are starting to trend higher. As a trend-follower, the "trend higher" part is all that I really care about. But there's also something else that has started to happen in the banking sector that could be the start of very bullish trend: the pickup in M&A activity. Last week, Wisconsin-based Marshall & IIsley (MI) agreed to be acquired by the Bank of Montreal (BMO), and on Wednesday, Hancock Holding (HBHC) agreed to buy Whitney Holding (WTNY) in a stock-for-stock transaction worth $1.49 billion.

This pickup in M&A activity among the banks tells me that the smart money is finding value in this beaten-down sector. That combined with the fact that many of the bank stocks are starting to look better technically tells me it's time to start looking for buys in the group. More important, it tells me that this sector could be huge winner in 2011.

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