I don’t think “market timing” is a good investment strategy — in fact, it’s not a strategy at all — but it can be a worthwhile experiment if played with money you don’t mind losing.
One way to time the market is to buy low-cost exchange-traded funds (ETFs). These investments act as mutual funds — a portfolio of a number of stocks — that can be purchased through the stock market like any other stock. Using ETFs rather than individual stocks for market timing allows the investor to mitigate the risk of investing in just one company. Powershares Dynamic Banking (PJB) is one such ETF, designed to track the retail banking industry.
Are banks ready for a rebound? PJB is down 23% over the past 12 months. If it’s the right time, banking stocks might be able to provide not only a short-term gain, but a long-term gain if the market believes that this sector is deeply discounted due to all the various market conditions that have affected banks over the past year.
Some experts are saying that now is a good time to buy into the banking sector, but others believe that there will be more bad news ahead, trending stock prices further downward.
I’m investing for the long-term, but I wouldn’t mind finding bargains that might provide a significant increase over the next few years. Is banking the right industry for a fast recovery, and is now the right time?
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I think bank stocks in general are undervalued and a broad financial ETF probably wouldn’t be a bad idea at this point. Over the next 10-20 years you should do very well, with high income to boot. If you want quality, you could stick to USB or WFC, as both have low exposure to subprime loans.
I still think we have another 4-6 months before we see any stabilization, but even so, it never hurts to find a few bargains to add to your portfolio. Things will recover, and you’ll be rewarded when it does. As long as buying into one sector doesn’t throw your overall portfolio out of whack, I see no problem with adding some undervalued specialty holdings into the mix.
there may be more bad news, but as the poster above mentioned, usb or wfc would be good. personally, i think BAC is a solid play. they have low exposure, haven’t cut their dividend, and at current prices the dividend alone pays almost 11%.
Could you consider “looking for discounts” is timing the market? Well maybe for the short-term. Like Buffet says
“Get greedy when people get nervous and get nervous when people get greedy.”
Flexo,
Thanks for raising this issue. Your blog has continually been a useful resource. Discussions about profiting from economic fluctuations are especially timley.
To add a few words to the discussion, it not seems clear that the United States is in an undeniable inflationary environment. This suggest that inflation will act as a disincentive for saving, and given the current crisis in lending, it seems that most banks major business models – e.g. lending on margin – will be under pressure for the immediate future.
Given this, one could reasonable expect that the profitability of the financial setor is likely to decline. In so far as price follows earnings, it would also seem logical that the price of shares in financials would also decline.
Therefore the two logical courses of action would be either to take a short position or sell ones shares.
Best,
James
As an owner of bank stocks I would say the time to buy is not now. They are going to do nothing (except go down some more perhaps) for the rest of the year. Revisit this idea in Nov/Dec – don’t buy now.
Currently these banks have high dividends – but those will be cut as they simply can’t afford to pay out 9%. When they cut the price will drop. Like I said – they are a value, but wait til at least the end of the year. Personally I’m not looking for a bottom – I want to see consistent gains for about 3 months before I’m willing to go back in – too many false bottoms already in the past year.
A few months ago, I was patting myself on the back for buying the 2x leveraged Financials ETF UYG. I then felt good selling off 1/3 at the peak with a 40% gain. I now feel lousy riding out this mess with the remaining 2/3 for a net neutral play. I unloaded last week. Unfortunately, I think things can still get worse faster than they will improve. You may see this one drop to the low teens (representative of large financials, banks, investment houses). When that happens, buying back in could be quite lucrative given the leveraged rebound effect. But buyer beware; we may be in this funk for a year or two more; things continue to deteriorate.
I bought USB a couple of months ago and am holding – it held reasonably well, but dropped a little this month I guess in sympathy – there was no real news since last earnings – but this can be said about zillion other companies some with zero exposure to loans. I don’t plan on buying bank ETF right now – too many banks with plenty of exposure to sub-prime. I think this is one case in which a couple of banks with low exposure to subprime may be better than all of them. Not sure about now though. I might consider a couple of others people above mentioned – will watch for a while, might buy later this year.
I definitely believe in Buffet’s margin of safety. You can’t time the bottom, but if you can value the stocks correctly and think you have a 25-40% buffer… then I would buy. You have to remember that typically the market is looking out 6 months. So what about 3 years from now, where will the businesses be at that point (rather than the stocks)?