Bank Stock Bottoms, Then and Now
July 6, 2008
 
 
Many market analysts are comparing our current market malaise with the banking crisis of the 1990/91 recession.  I decided to take a look at a Banking Index from 1990 to see if there are any similarities on the charts.  What I found was surprising. 
 
CONCLUSION
The bottom line is that banks have now fallen exactly the same amount they fell during the 1990 cycle, and in exactly the same amount of time.  I believe it is time to start slowly scaling into the banks, using ETFs.
 
ARGUMENT
Chart 1 shows that during the 1990 cycle, the index I use peaked on October 3, 1989, at a value of 143.26.  Just over a year later, the bottom was put in on October 31, 1990, at 88.61.  The total loss in those 393 calendar days was 38.15%.  One year later, the index was trading at 152.52, a gain of 72% from the low.  The S&P500 was up 29% during the same period from 10/31/90 to 10/31/91.

Chart 1 
Bank Stocks During the 1990 Bottom
 

Fast forward to 2007.  On 10/09/07, the Banking index peaked at 1089.89.  On Monday 7/7/2008, it closed at 669.72.  The total loss was 38.55%, almost exactly what the banks lost from top to bottom in 1990.  On Tuesday, yesterday, the index staged a large upside day, closing at 692.94, up 3.5% on the day.
 
Chart 2 
Bank Stocks Making a 2008 Bottom?


Finally, if we use the June 2007 peak as the top for the index (1088.65), and add 393 days, we get 6/28/2008.  That date represents the same time it took the banks to bottom out in 1990.  This time around, the loss was 36.25% through 6/28/08, very close to the 1990 loss of 38.15%.  The argument to use the June peak comes from the fact that modern ETFs that track the financials peaked on June 1, 2007.  These ETFs were not around in 1990, so a banking index was used for this study.
 
Either way you slice it, I believe it is too late to short the banks, despite the amount of negative press currently and write-downs that may be coming.  In fact, over the past week I started buying a banking index in my long-term portfolio.  My strategy is to scale in and hold longer term, at least a year.  To reduce individual company exposure, I am using ETFs.  My favorites are SPDRs Select Sector Financial ETF (XLF), and ProShares Ultra Financials ETF (UYG).  The second moves 2 times the percentage of the first, both up and down. 
 
 
Dan Grill
 
Data:  TeleChart (http://www.worden.com/),
Index data: MG411 - Money Center Banks, UYG, XLF
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