The Week Ahead and Two Weekly Picks

August 16, 2009

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A number of increasing stories and analysts seem to be growing more and more cautious about the stock market. It is not that most agree we are in a great position and the economy is recovering. What they all seem to be saying is that we moved pretty fast, and the market has become a bit OVERVALUED.

For example, I took a quick glance at Seeking Alpha tonight. On their "Macro View" section, the company has a market outlook section with stories about what direction writers believe the market is going. On it, the stories are 2:1 in a negative view of the market. Now, it is always easier to be a bear when the market gets much higher and looks ready for a correction, but if most people are thinking like this…doesn’t that mean its most likely market sentiment.

The market has made some ridiculously great profits, but this week might be a bit of a weaker week. Let’s rundown what is happening this week, what to expect, and what will shape this market’s red and green days.

To start, over the weekend, the big news we got was the shutting down of Colonial Bank. Colonial Bank was a major mortgage lender out of Montgomery, AL. The bank closing was the largest of the year, and the sixth largest of all time. The company had over $20 billion in assets. This is not some measly mom and pop joint. This was a large, second tier, regional bank. BB&T Corp. will be taking over the bank, but this should have some very adverse effects in the market. Especially, since financials have had such a strong run as of late.

One of the most defining economic data points for the week will be housing data. Monthly information on building permits, housing starts, and existing home sales for the month of July will be released. While I cannot venture to guess which way they will go, my one worry is that housing has had a great run. If the data is not exceptional, will it mean the housing sector could come unwinding. Plus, with how exceptional and unexpected last month’s numbers were, could the data be a bit overreaching.

Another important aspect of this week is the retail earnings. Big names in retail continue to release earnings. What we saw last week was good earnings that beat expectations, but there weren’t any home runs. Yet, the market reacted like they were. This may work similar to the housing data. If the earnings aren’t exceptional and just more of the same, will it be enough to continue to propel these stocks forward. With the sort of market sentiment I am sensing, I say it will not be enough.

The final tidbit that I want to share before I get into the picks is about China. I saw an interesting clip on CNBC about how China’s market is in the midst of the beginning of what appears to be a selloff, and it has really grown flat as of late. Most analysts there believe the Hang Seng may see a pullback. The Dow, at the same time, has pretty much followed suit being short and looking ready to sell off. I think if we see red on Monday from Asia, it should signal something similar for the USA, and I would look to China’s Hang Seng throughout the week for a strong barometer of America’s market that day.

Buy of the Week: Ultrashort Proshares Financial (SKF)

Monday should start what could be a rough week for the financials. The news about Colonial Group was anything but good for the sector. It is the sixth largest bank failure, and one would think might make this sector snap back to reality. Here are some numbers on what this sector has been doing. Direxion’s Daily Financial ETF, in one month, has gone from $45 to $70 per share, a gain of nearly 60%. The SPDR Financial Select ETF (XLF) has gone from $11 to $14, a gain of over 25%. The real gem, though, is that iShares Dow Jones US Regional Bank Index (IAT) has gone from $17 to $21 per share, a gain of nearly 25%. The iShares are notorious for their very low beta. That is a huge gain.

So, the gains in the sector have been pretty enormous. The news has been bullish and positive. The beginning of some weaker, bearish news, such as Colonial Bank, may be in store for the sector. Monday we will also get the beautiful earnings from CIT Group Inc. I hope they don’t announce they are going bankrupt, but some are speculating this may be true. This would kill the financials.

If you look across the board at the banks, they are all overvalued from small to large cap. Obviously a stock doesn’t just jump down because it’s overvalued, but these two pieces of news could be a catalyst to being some selling that we saw on Friday. Further, on Monday and Wednesday there is no crucial economic data. I see that as bad not good for the market because I think sentiment is growing more short term bearish, and we will need good numbers to rally this week.

Housing numbers, solar stocks, and retail earnings will definitely play a part in the market’s direction, but my guess is look for financials to be the laggard.

SKF is pretty undervalued at 28.60, so buying in the 28.50 – 29.00 range, and selling out at the 31.00 – 32.00 range would be solid for the week.

Short Sale of the Week: Regions Financial Inc. (RF)

For the same reasons I like SKF, I don’t like Regions. Regions is a southern regional bank. Colonial is a southern regional bank. Even more so, Regions is one of those banks that has gone up way too high, way too fast. It is leading the pack with its over 75% gains in one month. Rightfully so, the stock is way under its market value, and it has more room in the long term to grow. However, with any bearish news, one has to expect a significant amount of profit taking is going to occur.

On the charts, RF is outside of its upper bollinger band. This is a large signal that some selling should occur. The stock’s RSI is almost at the 75 level, as well. That is another red alarm for selling, and both slow and fast stochastics are heavily overbought. Any technical analyst would be salivating at this chart. The chart is a bit skewed because of where the market is coming from, but the technicals combined with the fundamentals are not in this stock’s favor.