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
Karim began his trading career early… very early. While attending boarding school in England, he recognized the value of the homemade snacks his mom sent him every semester and sold them for a profit to his fellow classmates, who were trying to avoid the horrendous British food they were served.
He then graduated to stocks and options, becoming one of the youngest chief financial officers of a brokerage and trading firm that cleared through Bear Stearns in the late 1980s. There, he learned trading skills from veterans of the business. They had already made their mistakes, and he recognized the value of the strategies they were using late in their careers.
As co-founder and chief options strategist for the groundbreaking publication Wall Street Daily, Karim turned to long-term equity anticipation securities (LEAPS) and put-selling strategies to help members capture gains. After that, he honed his strategies for readers of Automatic Trading Millionaire, where he didn’t record a single realized loss on 37 recommendations over an 18-month period.
While even he admits that record is not the norm, it showcases the effectiveness of a sound trading strategy.
His focus is on “smart” trading. Using volatility and proprietary probability modeling as his guideposts, he makes investments where risk and reward are defined ahead of time.
Today, Karim is all about lowering risk while enhancing returns using strategies such as LEAPS trading, spread trading, put selling and, of course, small cap investing. His background as the head of The Supper Club gives him unique insight into low-market-cap companies, and he brings that experience into the daily chats of The War Room.
Karim has more than 30 years of experience in options trading and international markets, and he is the author of the bestselling book Where in the World Should I Invest?