Bank Fundamentals Point the Same Way as Technical Data

Sept. 5 (Bloomberg) -- On today's "Insight & Action," Adam Johnson looks at how pull backs on the banks have been good buying opportunities. He speaks on Bloomberg Television's "Street Smart." (Source: Bloomberg)

Let's focus on some very compelling technical data on financial industry stocks, following yesterday's discussion of 28 percent earnings growth for the S&P 500 financial sector (the strongest of all industry groups).

Financials have been trending higher for two years now, with opportunities for buying stock in the dips along the way. Thanks to Chris Verrone of Strategas Research Partners for sharing his analysis.

Verrone and his team track the percentage of stocks in the index that are trading above their individual 50-day moving averages. This figure varies widely over time and provides a good indicator of medium-term momentum. Recently the percentage dipped below 10 percent, tangible proof the August sell-off took its toll.

Combining these two charts provides two important observations:

1. Plunging momentum (few stocks above the 50-day moving averages) coincides with a significant price drop for the index.

2. These dips have proved excellent buying opportunities, as evidenced by subsequent price rallies.

Verrone identified 334 occasions since 1990 when financial-sector momentum plunged (as defined by fewer than 10 percent of the 81 stocks in the index holding above their respective 50-day moving averages). Buying these climactic selling moments generated significant returns:

Combining our analysis of the past two days, the 28 percent earnings growth for financial companies ranks highest of all ten industry groups, and now charts suggests an historical tendency towards higher prices. Each is significant; the combination is compelling. We like seeing fundamentals align with technical indicators.

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