Are bank stocks ready to rally?

Stop laughing. It’s not a crazy idea.

Oh sure, the banking industry is a mess. The balance sheets are unreadable. Income is questionable. Consumer sentiment toward the banks is more negative now than at any other time in my life. And almost no one thinks bank stocks are good investments.

[ad#Google Adsense 336×280-IA]It’s hard to imagine conditions getting any worse for the banking industry.

Of course, you know what they say… If it can’t get any worse, it has to get better.

I started thinking about bank stocks as I was reviewing charts this past weekend. Many of the bank charts are oversold and exhibiting “bottoming” patterns. Take a look at this chart of Citigroup (C), for example…

Citigroup shares have been steadily declining in a downward channel – a series of lower highs and lower lows – since the stock collapsed in early August. But for the past few weeks, while the stock has been moving lower, the moving average convergence-divergence indicator – which measures the momentum behind the move – has been moving higher.

This means the stock’s momentum has been improving, even while the stock price has been falling. This “positive divergence” is often an early sign of a potential change in trend.

On Monday, Citigroup broke out to the upside of its downward channel… and the stock now appears poised for higher prices – perhaps after a quick retest of its breakout level. From a purely technical perspective, this is an excellent sign.

Things look pretty good from a fundamental perspective, too.

My friend and colleague, Dan Ferris – who writes the Extreme Value newsletter – is probably the best analytical, value-oriented investor I know. Dan recently commented about how cheap and undervalued the banking sector is. He’s even recommending a couple of bargain-priced bank stocks in his newsletter.

So maybe the idea of a bank rally isn’t so crazy after all. If the fundamentals are cheap, and the technicals are improving, higher stock prices can’t be far behind. I’ll be looking to buy some bank stocks on the next market pullback. You might consider doing the same.

Best regards and good trading,

— Jeff Clark

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Source:  The Growth Stock Wire