Don't Bank on Bank Stocks, Just Trade Them

NEW YORK ( TheStreet) -- Bank stocks have been one of the top performing industries over the past twelve months, and this can be measured by the performance of the PHLX KBW Banking Index ( BKX).

The BKX is up 52.3% since bottoming in October 2011, and is up 25.9% so far in 2012, while the S&P 500 is up 34.1% since October and 14.6% year to date.

The BKX has been technically overbought on its weekly chart since the week of Sept. 7, and the finance sector is overvalued by 13.2% according to ValuEngine .

Bank stocks have benefited from the quantitative easing moves, and on the slow and steady improvement in the banking system that I wrote about in The Banking System's Slow, Stressful Recovery on Sept. 4.

If the "QE Fatigue" I discussed last Friday in QE Fatigue Plagues Transports, May Be Contagious spreads to the money center and regional banks, the downside risk is significant.

I discussed some of the issues facing the banking system on Sept. 5 in 'Too Big to Fail' Money Center Banks Still Face Stress and because of these concerns investors should not be greedy and book some profits now.

Traders of bank stocks should continue to employ a "buy and trade" strategy, but be aware of the downside risks among the eleven components of the BKX I profile today. I last profiled five of these banks on Aug. 15 in Time to Book Profits in Financial Stocks: Opinion.

Chart Courtesy of Thomson/Reuters

The daily chart for the BKX (49.58) shows declining momentum with the 21-day, 50-day and 200-day simple moving averages at 49.11, 47.38 and 45.46. My quarterly and annual value levels are 46.03 and 42.98 with a weekly pivot at 50.70 and monthly risky level at 52.99 versus the year to date high at 52.11 set on Sept. 14 in reaction to QE3.

Additional Observations from the FDIC Quarterly Banking Profiles:

One measure of the health of the banking system is employment, which peaked at 2,214,621 employees at the end of 2007. At the end of 2010 employment was 2,042,030, down 7.8%. At mid-year 2012 employment was up to 2,108,200 but still down 4.8% from the end of 2007.

Total Real Estate Loans are still down 16.2% since the end of 2007 with Residential Mortgages down 16.5% and Construction & Development loans down 65.4%. These are signs that tight credit conditions remain for home buyers and that banks are reluctant to lend to home builders and community developers.

Declining Reserves for Losses have boosted bank earnings over the past several quarters, but reserves remain 72.4% higher than at the end of 2007 at $176.5 billion. In addition the write-off of Noncurrent Loans has contributed to earnings and this problem is still 165.6% above 2007 levels at $292.2 billion. This is a warning that the banking system still has significant additional de-leveraging to do.

Finally, the banking system still has $41.8 billion in Other Real Estate Owned, up 244.2% since 2007. This represents only part of the hidden inventory of unsold existing homes.

I will be updating my thoughts and profiles for the home builders tomorrow.

The above table shows data from www.ValuEngine.com covering eleven stocks in the BKX.

Reading the Table

  • OV / UN Valued: The stocks with a red number are undervalued by this percentage. Those with a black number are overvalued by that percentage according to ValuEngine.
  • VE Rating: A "1-Engine" rating is a strong sell, a "2-Engine" rating is a sell, a "3-Engine" rating is a hold, a "4-Engine" rating is a buy and a "5-Engine" rating is a strong buy.
  • Last 12-Month Return (%): Stocks with a red number declined by that percentage over the last twelve months. Stocks with a black number increased by that percentage.
  • Forecast 1-Year Return: Stocks with a red number are projected to decline by that percentage over the next twelve months. Stocks with a black number in the Table are projected to move higher by that percentage over the next twelve months.
  • Value Level: is the price at which to enter a GTC Limit Order to buy on weakness. The letters mean; W-weekly, M-monthly, Q-quarterly, S-semiannual and A-annual.
  • Pivot: A level between a value level and risky level that should be a magnet during the time frame noted.
  • Risky Level: is the price at which to enter a GTC Limit Order to sell on strength.

Bank of America ( BAC) ($8.93 versus $7.72 on Aug. 15) was rated a hold on August 15 and between then and now was upgraded to buy according to ValuEngine. BAC has a favorable P/E ratio and is above its 200-day SMA at $7.76. Book profits on strength to my weekly pivot at $9.55 then employ a "buy and trade" strategy between the value level and risky level.

BB&T Corp ( BBT) ($33.17) has a buy rating, a reasonable P/E ratio and is above its 200-day SMA at $30.00. Book profits and employ a "buy and trade" strategy between the value level and risky level.

Citigroup Inc ( C) ($32.86 versus $28.78 on Aug. 15) has been buy rated according to ValuEngine, has a favorable P/E ratio and is above its 200-day SMA at $30.37. Book profits on strength to my weekly pivot at $34.60 then employ a "buy and trade" strategy between the value level and risky level.

Fifth Third Bank ( FITB) ($15.56) has a strong buy rating, a favorable P/E ratio and is above its 200-day SMA at $13.78. Book profits and employ a "buy and trade" strategy between the value level and risky level, and the risky level was tested on Tuesday.

JP Morgan Chase ( JPM) ($40.55 versus $36.99 on Aug. 15) was rated a hold on August 15, but has since been upgraded to buy, has a favorable P/E ratio and is above its 200-day SMA at $37.88. Book profits then employ a "buy and trade" strategy between the value level and risky level.

PNC Financial ( PNC) ($64.54) has a buy rating according to ValuEngine, has a reasonable P/E ratio and is above its 200-day SMA at $61.15. Book profits then employ a "buy and trade" strategy between the value level and risky level.

Regions Financial ( RF) ($7.21) has a strong buy rating according to ValuEngine, has a reasonable P/E ratio and is above its 200-day SMA at $6.17. Book profits then employ a "buy and trade" strategy between the value level and risky level.

SunTrust Banks ( STI) ($28.20) has a strong buy rating according to ValuEngine, has an elevated P/E ratio and is above its 200-day SMA at $22.99. Book profits then employ a "buy and trade" strategy between the value level and risky level.

US Bancorp ( USB) ($34.12 versus $33.18 on Aug. 15) has been buy rated according to ValuEngine, has a reasonable P/E ratio and is above its 200-day SMA at $30.93. Book profits then employ a "buy and trade" strategy between the value level and risky level.

Wells Fargo ( WFC) ($34.72 versus $33.96 on Aug. 15) has been buy rated according to ValuEngine, has a favorable P/E ratio and is above its 200-day SMA at $32.16. Book profits then employ a "buy and trade" strategy between the value level and risky level.

Zions Bancorp ( ZION) ($20.33) has a buy rating according to ValuEngine, has an elevated P/E ratio and is above its 200-day SMA at $19.05. Book profits then employ a "buy and trade" strategy between the value level and risky level.

Nine of 11 stocks profiled today are undervalued fundamentally with Citigroup undervalued by 64.3%. BB&T and Wells Fargo are slightly overvalued by 3.2% and 4.7% respectively.

All 11 bank stocks have had tremendous gains over the past twelve months; from 31.7% (Citigroup) to 111.4% (RF).

All are projected to be higher over the next 12 months, but gains are likely to dwarf the gains of the past 12 months.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Richard Suttmeier has an engineering degree from Georgia Tech and a master of science from Brooklyn Poly. He began his career in the financial services industry in 1972 trading U.S. Treasury securities in the primary dealer community. In 1981 he formed the Government Bond Department at LF Rothschild and helped establish that firm as a primary dealer in 1986. Richard began writing market research in 1984 and held positions as market strategist at firms such as Smith Barney, William R Hough, Joseph Stevens, and Rightside Advisors. He joined www.ValuEngine.com in 2008 producing newsletters covering the U.S. capital markets, and a universe of more than 7,000 stocks. Richard employs a "buy and trade" investment strategy and can be reached at RSuttmeier@Gmail.com.