Shortly I’m going to tell you which two banking stocks are on my list of potential short selling opportunities. But first…
Sometimes it pays to step back and look at the market from a distance.
The best way to do that in the stock market is by looking at an index. One such beautiful example is the chart for doing so is the S&P500.
It’s been tracing out a near perfect range (or distribution of price) over the past 10 years. A quick look at the chart will show you that the range from 2000 to 2003 suffered a false break-out through the top of the range in 2007.
That was also the all time high.
And recently there was a false break of the bottom of the range when the market crashed last year.
Importantly, the rally of the past 9 months has still only retraced to the .382 level of the whole move down. You should consider that the great bulk of the last 10 years of buying remains out of the money.
The point of control (POC) of this whole distribution is the 50% which is at a level of about 1164 in the S&P500. I believe this is the line in the sand. The current momentum is definitely still up at the moment, although I believe the area between the .382 and .50 (the sell zone in the chart below) is where this rally will start to falter.
But who knows, perhaps the current rejection at the .382 level will be the high of this rally and we are on the edge of another move down. However, this is yet to be confirmed by the short term trend and momentum indicators so the jury is still out. But there are definite signs of fatigue showing.
With 10 years of buying still out of the money, it won’t take much to convince many people that this rally has provided a get out of jail free card after nearly losing their shirt last year.
The rush for the exits could be swift once the music stops.
So how can you profit from an end to this rally?
Well, the financials have had a stellar run in the past few months, both in Australia and overseas. If you look at the chart below of the financials, it shows a 50% retracement of the whole move down…
If there is any sector that remains at risk of more losses it’s the financials. Alt-A loan resets and a faltering commercial property market is sure to fire up the red ink in the US.
Back here, the Australian banks are continuing to leverage themselves to the residential property market. Now that we have entered a new rising interest rate cycle here in Australia and the first home owner grants are starting to get phased out, this could lead to some pressure on the overheated housing market.
The regional banks such as Bank of Queensland (blue line) and Bendigo and Adelaide Bank (red line) are two banks that have aggressively pursued the residential mortgage market. For example 73% of Bank of Queensland’s loan book consists of residential mortgages. If there are any signs of distress in the property market, then these two banks would be exposed.
If you are looking for opportunities to short specific stocks in this market then these two are worth keeping an eye on.
We’ll certainly be doing that for our Slipstream Trader members, and letting them know when the opportunity arises.
Regards,
Murray.
