About three weeks ago, I wrote a couple of posts about the big banks’ CCAR stress test results. In this post prior to the results on March 26, I provided the following warning to shareholders of the banks subjected to the test:
As I have mentioned before, with these stress tests, it’s all about the market’s expectations. There’s no way to know fully what the market’s expectations are, but one indicator is recent trading of big bank stocks. In that sense, I am someone worried about WFC, which is trading about 2% below its all-time high. That is some high expectations if I’ve ever seen them.
As it turns out, I was right to be worried, as all of the big banks I highlighted in the previous post have seen their share prices fall in the three weeks since the CCAR results were released. Take a look at a chart of the XLF, an ETF for the financial sector:
Two things should stand out about this chart. The first thing that should stand out is that the financial sector has really struggled since the release of the CCAR results. However, the other thing that should stand out is that the XLF was essentially at it’s 52-week high at the time of the results. In fact, if we extended the time frame of the chart farther into the past, you could see that the XLF was at its highest point in over five years at the time of the CCAR results! Now that is some high expectations!
A few days prior to the CCAR results, I compared five U.S. banking giants and provided an explanation for why I believe that WFC is the best of the bunch. Given the large drop in the financial sector as a whole over the three weeks following the test results, I decided today to take a look at these same five banks and see how their share prices have fared during that three-week period. I included a column related to the test results themselves, which notes that Citigroup’s capital plan was rejected and Bank of America and Goldman Sachs only gained approval for their plans after last-minute re-submissions.
So yes, the sell-the-news scenario I was fearful of did in fact occur. But all selling is not created equal. As you can see in the table, WFC is down less than 1% while the other four banks are down over 4%, with JPM getting the worst of the selling pressure and dropping more than 8%. If you are a WFC shareholder like me, a 0.8% loss is obviously not ideal. But the key to success in the market is picking winners for the long run. No stock rises in a straight line for an extended period of time, and the financial sector has seen a pullback lately. Pullbacks are part of a healthy bull market. The best stocks differentiate themselves just as much during pullbacks as they do during upswings. I don’t know if we have seen the worst of this particular pullback in the financial sector. But whenever the tide eventually turns for the banks, WFC looks like it will be starting from a much higher low than the other banks, and that’s exactly what I’m looking for in a stock: falls less than its peers and rises more than its peers. It’s hard to get too excited about a stock falling less than its peers, but believe me, finding stocks with this trait is a major part of the recipe for making money in the market over time.
Wondering what an ETF is? Curious as to what I mean by “sell-the-news scenario?” Or maybe you just picked the wrong bank on that table of big banks and you want to understand the reasons you should have known to pick WFC instead? I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market in five years using only basic principles of psychology and common sense. To read about how I did it, check out my book, Beating Wall Street with Common Sense, and stay tuned to www.tradingcommonsense.com!