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LAST WEEK, THE FEDERAL RESERVE announced a second round of Treasury purchases -- otherwise known by its nickname, "QE2" -- and stocks took off to the upside.
On the charts, winners with technical breakouts included banks and the rest of the financial sector, the former having sat out most of the September-October rally.
Unlike exchange-traded funds representing the strong retail sector and the soaring techs, the Select Sector SPDR-Financial ETF (ticker: XLF) was mired in a trading range since May. And even though its price was relatively stable, its performance relative to the market was not very good.
Investors holding bank stocks, for example, watched as everyone else made money.
But the recent trading-range breakout (see Chart 1) suggests a change in market tone that could allow banks to reclaim some lost ground relative to the rest. New highs, however, are a different story as the previous high water mark set in April is still a formidable 10%-20% away, depending on the index used.
Chart 1
For example, BBT (BBT), a North Carolina-based bank, rode the QE2 surge and broke out to the upside from a technical "double bottom" (see Chart 2). This "W" shaped pattern marks a low in a bear trend followed by a bounce and another attempt to probe even lower. That attempt, however, fails as buyers emerge to soak up all excess supply of shares that sellers can offer. The upside reversal is complete when prices move above the center of the "W" in the pattern as the bulls emerge victorious.
Chart 2
While the completed pattern is a good start, it is not the green light for a long-term sustained move higher. But based on several technical factors, including the size of the pattern and overhead resistance provided by the 200-day moving average, it would not be a stretch for it to trade above 27 for an approximate gain of 8% from current levels.
Most of the major bank stocks also showed nice jump higher. Citigroup (C) moved above resistance at 4.30 with heavy volume and had a rather positive turn of events with regard to its major moving averages (see Chart 3).
Chart 3
Not only does the stock now trade above its 50-day average, which is turn above its 200-day average, but both averages now have positive slopes. In other words, the stock is in proper configuration for continued gains.
Further, one look at the trendline drawn from its August low and we can see that there is ample room for a pause or even a pullback without endangering its young rising trend. In other words, the stock looks better than it has in a long while.
To be sure, the financial ETF contains a good deal of stocks from the real estate investment trust group. Such names as Simon Property Group (SPG) have reached levels not seen since October 2007 and contribute to an upward bias in the ETF.
But insurance companies and money manager are pulling their weights as well. For example, Franklin Resources (BEN), manager of the Franklin and Templeton brands of mutual funds, among others, is up 43% since July and is also at a three-year high.
The point is that lagging stocks that are finally emerging - the banks, in this case - can offer good choices for investors. They have lower and better-defined risk compared with high-flying momentum leaders with the potential to ride whatever wave is currently taking the whole market higher.
Getting Technical Mailbag:Send your questions on technical analysis to us at online.editors@barrons.com. We'll cover as many as we can, but please remember that we cannot give investment advice.
Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
Comments? E-mail us at online.editors@barrons.com
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