When You See This Signal… Buy, Buy, Buy!
I have one indicator that will serve you well in this type of market…
For a longer-term buy signal, I look to the performance of these four stocks: Wells Fargo (NYSE: WFC), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C) and Bank of America (NYSE: BAC).
These companies are considered to be money center banks and fall into the category of too big to fail (TBTF).
In order to have a bona fide rally in the market, these “Four Horsemen” must participate. It’s simple really. If banks aren’t performing well, then the underlying economy is not performing well either.
Today, banks in the U.S. are overcapitalized. After the Great Recession, banks were forced to increase their capital base. In other words, they had to reduce leverage by keeping more cash available.
That left them in very good shape to deal with the current crisis, good news from a fundamental basis. However, as far as sentiment is concerned, the banks are performing the worst of the non-travel sectors.
While the Nasdaq hit new 2020 highs last week and this week, banks hit lows not seen in almost a decade, in the case of Wells Fargo. That is not right. It means the market is not seeing a broad-based rally, but one that is narrow and destined to fail.
Here are a few things we know moving forward…
- The Federal Reserve will do everything it can to prop up this economy and the banking system.
- The banking system is the healthiest it’s ever been in the modern history of the country.
- This downturn was created to protect the public from a pandemic.
- The banking system will not fail – something that almost happened in 2008 and 2009.
The banking sector’s near-term outlook is cloudy.
Mortgage forbearance, credit card liability, and small- and big-business loan defaults are all on the horizon. But with a 50% drop in the sector, a lot of that is factored in. The banks have already set aside large amounts of reserves for bad debts and losses. Not only that, but there will probably be more to set aside in the future.
However, the banks’ long-term future is strong. The current COVID-19-induced sell-off will not last forever.
Action Plan: Bank stocks are now the best barometer as to when we will see a recovery.
It’s not Microsoft, not Apple, not even Amazon.
Those companies are great, but they are not the buy signal that I look for. The money center banks are that signal. That’s why you should be paying close attention to them.
There is no better place to follow these companies in real time than in The War Room!
P.S. A shorter-term indicator to watch is a non-leveraged municipal closed-end bond fund called the Nuveen Municipal Income Fund. Because it is a very “safe” investment, when it sells off, it means that investors are panicking and selling everything.
About Karim Rahemtulla
With more than 20 years of experience, Karim has mastered the subtle art of options trading. What we admire about him is his ability to score huge gains while minimizing the massive amount of risk that often comes with options. Beyond his expertise in options trading, he is also the author of the best-selling book Where in the World Should I Invest? He publishes weekly about smart speculation in his latest free e-letter, Trade of the Day.