If you dare to state that you are selling your Canadian bank holdings to some investors, they almost bite your head off. Aren’t you better to just ignore the fluctuations of the bank stock share prices, and hold them for their generous, and often rising dividend yields- they ask?
The attitude towards buying and holding bank stocks over the long run was born in the 1990’s. Back then, the AIC mutual fund group popularized the concept of owning bank and insurance companies through their “Buy. Hold. Prosper” advertising campaign. Quite frankly, during the 1990’s, buying and holding bank and insurance stocks WAS a great strategy. But, like all trends, nothing lasts forever. The AIC fund floundered as we entered into a new era of secular sideways markets. Buying and holding financial stocks no longer allowed you to prosper.
Above is the weekly chart of the BMO Equal Weight CDN Bank ETF (ZEB-T). Note that I used the Thompsons chart as opposed to my usual Stockcharts.com version—Thomson is a price-only chart, not including distributions. I sold ZEB out of the equity platform I manage about 2 weeks ago. You can see that it recently hit its April 2011 highs, and dropped. You’ll also notice that the sector peaked in April of 2012, and in April 2010 as well. Brooke Thackray’s research suggests a peak for the banks somewhere around April from his long-term seasonal work—so this makes sense. Nonetheless, being a technical guy first and foremost, I also sold the last of my Canadian bank holdings (National Bank, NA-T) last week due to the sector getting into its prior resistance levels.
From their April highs over the past 3 years, the equal weight bank index ETF (ZEB-T) experienced double-digit losses. Sure, the sector eventually retraces its way back up to the current high levels. And yes, there is always the potential for this time to be different—where the banks break out through their old resistance and carry on to new highs. But the risk/reward potential for that to happen is low, given seasonal influences coming up, and current technical resistance.
My answer to the investors who ask the question: why not buy and hold the banks, considering their dividends?
Go ahead! But there is a reasonably high chance of a market high in that sector now or in the next 2 months (which could result in a 10=20% loss on your bank stock until its next recovery)—why not sell the banks now, and see if we can’t re-buy them at lower levels later? If the market does as it has in recent years, the drawdown by the banks will be far greater than the dividend earned by holding them over a typical pullback.
I’ve sold my banks, and I do expect an eventual opportunity to re-buy them later in the year at lower levels. Investors can make their own decisions regarding whether that trade makes sense for their particular situation.
Updates to ValueTrend website
We’ve added a new tab under our “performance” page. In addition to monthly statistics on our equity model, we’ve added a tab that looks at one of our fixed income models (bond/preferred share model). Visit www.valuetrend.ca for more information.