Trading the 24 Hold-Rated Banks in the Regional Bank Index

TheStreet.com

NEW YORK (TheStreet) -- All 24 components of the KBW Bank Index begin 2014 with hold ratings according to www.ValuEngine.com. Of these, 17 had buy or strong buy ratings as 2013 kicked off its bull run.

Among the former strong buy-rated banks is the "too big to fail" Bank of America , which began 2014 with a new multi-year high after gaining 34.1% in 2013. My monthly risky level for January is $16.57. Capital One also began 2014 with a new multi-year high vs. its January risky level at $79.90.

The other three of the big four had buy ratings a year ago: Citigroup gained 31.7% in 2013, JPMorgan gained 33% and Wells Fargo gained 32.8%. With hold ratings now, bank stocks will be lucky to pick up another 5% or more in 2014. JP Morgan set a multi-year on New Years Eve with its January risky level at $60.11.

The finance sector ended 2013 overvalued by 26.5% with an overall gain of 17%. The "too big to fail" banks thus outperformed the sector. The finance sector also had the lowest price-to-earnings ratio among all 16 sectors at 18.1%. With 84% of the 2967 stocks in this sector having hold ratings the sector gets an equal-weight rating. Hold-rated bank stocks can still be traded using my buy-and-trade profiles.

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In addition to providing the gains for 2013, this table provides the closes and performances since Oct. 9 when I last presented this table on Oct. 10 in Four 'Too Big to Fail' Regional Banks Are Above 200-day SMA. Today, all 24 are above their 200-day simple moving averages, which means that bank stocks are subject to a reversion to the mean, which is my theme for the major equity averages presented in Stocks Begin 2014 With Inflating Bubbles and posted on Jan. 2, 2014.

Four regional banks had gains above 50% in 2013 including Comerica up 56.7%, Huntington Banc up 51%, Keycorp up 59.4% and State Street up 56.1%. Comerica and Huntington Banc were the two best performers since Oct. 9 with gains of 22.1% and 18.8% respectively.

The table shows that all 24 banks are overvalued as part of the universe of 86.4% of all stocks that are overvalued as 2014 begins. We show that 20 of 24 are overvalued by more than 20%, which is 83.3% of the index components vs. 61.2% of all stocks overvalued by 20% or more.


The cheapest stocks by valuation are: Commerce Bancshares overvalued by 18.7%, First Niagara overvalued by just 4.5%, M&T Bank overvalued by 17.3% and Peoples United overvalued by 6.9%.

As shown in the table, all 24 stocks have "3-Engine" or hold ratings according to ValuEngine. A hold rating stock can trade up 5% without getting upgraded to being a "4-Engine" or buy-rated stock, or can trade down 5% without getting downgraded to a '2-Engine' or sell-rated stock. First Niagara is projected to gain 4.9% in 2014 so this bank stock is closest to an upgrade potential.

The column that is headed P/E Ratios represents the trailing 12-month price-to-earnings ratios. JPMorgan has the lowest P/E ratio at 9.9. Northern Trust has the highest P/E ratio at 20.7.

The 200-day SMAs will be on the rise as the year progresses and my prediction is that bank stocks will test their 200-day SMAs at some point in 2014, as a reversion to the mean.

How to use Value Levels -- If you are looking to buy bank stocks or add to long positions, my buy-and-trade methodology recommends that you employ good-until-cancelled GTC limit orders to buy weakness to a value level shown in the table. The value levels followed by a 'Q' will apply until the end of March. Those followed by an 'S' will apply until the end of June. Those followed by an 'A' will apply for all of 2014.

How to use Pivots -- A pivot will likely be a magnet during the time frame shown by the letter; Q for the first quarter, S for the first half and A for the entire year. If a value level or risky level is violated during its time horizon that level becomes a pivot and has an 85% chance of being re-tested during its time horizon.

How to use Risky Level -- If you are looking to book profits on bank stocks, my buy-and-trade methodology recommends that you employ GTC limit orders to sell strength to a risky level shown in the table.

For most of the stocks I show two risky levels in the table. The risky levels followed by an M'will apply only for the month of January; Those with a Q will apply until the end of March. Those followed by an S will apply until the end of June. Those followed by an A will apply for all of 2014.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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