Financial Stocks - Close to a Bottom

Yesterday’s market gyrations were painful.  After seeing the global markets sell off on Monday (a holiday for the US markets), the Dow Jones Industrial Average followed suit on Tuesday.  We closed the day just under 12,000 after hitting an intra-day trading low of 11,508.  We haven’t seen these levels since September 2006.

Not to be left behind, the Federal Reserve also got into the act.  Ben “save the economy” Bernanke announced an emergency rate cut of 75 basis points.  This announcement came just a few days ahead of a scheduled January 30 Federal Reserve Board meeting.

I wonder what new information was uncovered that prompted this cut.

Apparently, some of the smartest economic minds feel that if we’re not currently in a recession, we’re headed for one.  Ben is clearly anticipating that the rate cut will flood the economy with capital and encourage economic growth.  Let’s hope he’s right.

“Don’t try to catch a falling knife!”

Trying to pick a bottom in this market can be a dangerous task.  In times when the market is volatile, like now, I like to focus on individual industries.  Looking for market signals in specific industries can be difficult.  However, every once in a while you find a particular piece of information that helps clarify your thinking.

Signals take many forms.  It can be as simple as a moving average changing direction, or important industry news that wipes out old thinking.  I recently found an important signal in the Financial Industry.

The $91 million dollar signal.

Financial industry insiders invested more than $91 million in their own stock according to Thompson.  Traditionally, when you see insiders buying a stock it’s a very positive sign.  Company insiders clearly have a good grasp on their company and industry.  When they buy, positive news is on the horizon.  Now, one insider buying stock is an interesting data point.  A whole heard of insiders buying stock is a huge signal.

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Back to the $91 million dollars.

$91 million is a lot of money and it came from a lot of different pockets.  This insider buying started in November of 2007.  I did a bit of research and discovered the last time insiders put this much money into their own stocks was in February 2003.

Look at what happened!  Financial stocks went on a great run climbing more than 45% over the next 24 months.  This is what I would call a significant signal.




Signals like these make me think that we may be nearing a turning point for the financial industry.  A few months ago, we told you to stay away from these stocks.  Since then a lot of bad news has come out, management teams have been replaced, and the government has been working on a stimulus package.  Now, I don’t think all the bad news is behind us, but we’re getting close.

The recent cut in interest rates is a huge help for the financial sector.  Banks will now be able to borrow money much more cheaply.  In the long term, this will result in the banks being much more profitable.

I believe that the large national banks may be the first to rally.  The smaller regional banks still have too much risk.  I will continue to monitor the financial industry very closely, as we may see an opportunity to re-enter these investments very soon.

•  Soybeans ($12.39 per bushel)

After climbing steadily since October of 2007, soybeans have fallen more than 7% in the last few trading days.  The commodity had reached an all time high of over $13.40 but retreated on renewed fears of a recession.

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