The financial sector is crashing.
Regional banks are going belly up.
Europe’s largest bank was forced into a shotgun wedding over the weekend.
Major money-center banks in the U.S. borrowed a record amount of money from the Federal Reserve last week.
And depositors are wondering if their money is safe.
As a result, financial stocks have been hit hard over the past couple of weeks. The Financial Select Sector Fund (XLF) was trading at $36 per share in early March. It closed at $31 on Friday.
That’s a 14% drop in just two weeks.
It takes guts to step up and buy into a sector that is under such intense selling pressure. Most traders would just step aside and move to the sidelines.
But one of our most reliable trading indicators just generated a buy signal for financial stocks. And based on its track record, bank stocks are likely to be higher in the weeks ahead.
Take a look at this chart of the Bullish Percent Index for the Financial Sector (BPFINA)…
A bullish percent index shows the percentage of stocks in a sector that are trading in bullish technical patterns. It’s an easy way to measure overbought and oversold conditions for a sector.
Typically, a reading above 80 (80% of the stocks are trading in bullish technical patterns) means a sector is overbought. Readings below 30 indicate oversold conditions.
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Buy and sell signals occur when a BPI reaches extreme levels and then reverses. For example, when a BPI rallies above 80 and then turns lower, it generates a sell signal.
When a BPI dips below 30 and then turns higher, that’s usually time to buy. At least, those are the general rules.
The blue arrows on the chart point to the buy signals over the past year. Here’s how those signals played out in the KBW Nasdaq Bank Index (BKX)…
The BPFINA buy signals did not result in immediate, sustainable moves higher.
Instead, following the quick bounces after all three of the previous buy signals, BKX dropped back down and chopped around for a bit before mounting a multi-week rally.
But with a little patience, buying the bank stocks following the three previous BPFINA buy signals over the past year would have produced solid returns over the next two months.
If the same script plays out for the current buy signal, bank stocks should be higher by mid-May.
Best regards and good trading,
What are your predictions for bank stocks over the next months?
Let us know your thoughts – and any questions you have – at [email protected].