Tempted to buy the bank? Don’t catch a falling piano
Over the weekend, several people contacted me with questions about the banking sector. The questions revolve around a key point:
Since financial institutions are being bailed out and because bank stocks have plummeted, is it reasonable to buy banks now?
I told them to avoid this area.
Just last week, some investors believed buying Credit Suisse (CS) at $2 is a low-risk proposition. Those people are now staring at a loss of about 50% in just a few days.
Despite the current environment, an analyst at RW Baird recommends investors buy US Bancorp (USB) . On a second appearance on CNBC’s Ending BellBaird analyst David George said the following:
“In my view, this is not a crisis. I just don’t believe that Silicon Valley or Signature are really relevant comparisons. It’s a great opportunity to be more active on those who do not. this stock.”
I hope those words don’t come back to haunt Mr. George. I am certainly much less optimistic about the current situation for the market in general and for financial stocks in particular.
There is a saying in this business, “don’t catch a falling knife.” That’s great advice, but in the case of US Bancorp, the buyer runs the risk of a piano falling.
Chart source: TradeStation
Institutions are dumping this stock with gusto. On Monday, volume was approximately 4 times its 50-day average (point A). US Bancorp’s volume has been above normal every day since March 9.
USB is much below the 50-day (blue) and 200-day (red) moving averages, which looks ready to be crossed (point B). This is a sign of bearish momentum.
On US Bancorp’s weekly chart, a large double top (curves) pattern can be seen. This large bearish pattern formed over a four-year period.
Chart source: TradeStation
Why do investors feel the need to “bottom-fish”? We do it because everyone loves a bargain. It doesn’t matter if it’s a pair of shoes or a box of cereal, you’ll feel comfortable buying something for less than it’s worth.
The problem is, how can we accurately assess any individual financial institution when there are potential systemic problems with the entire sector?
If RW Baird or any other investment firm believes it’s safe to jump in, it’s just an opinion. Even if Mr. George’s assessment is correct, is the reward really worth the risk?
Until the extent of the damage is clear, there is no worthwhile reason to buy US Bancorp or any other name in the financial sector.
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