Why I’m out of Canadian bank stocks

February 6, 20139 Comments

 

 

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.

 

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9 Comments

  • Hi Keith:
    A regular reader of your blog I have noted when you got in and out of ZEB – dare say a great trade, I tried to emulate myself. However, I got out a bit earlier based on my seasonality research. Also, I am sure there is more upside if the S&P manages to hold 1510 and charges up.
    Your analysis on loss of capital compared to dividend earned, in this article will be very useful to many readers.
    Could you keep your readers abreast when you find a re-entry point based on your technical readings and interpretations, which I value much.

    Reply
    • Hi Khokon
      I try to post my thoughts on this and other sectors, including timing, on this blog.
      Thanks for the reply

      Reply
  • Hello Keith. Not sure if you discuss stock suggestions by bloggers. But the symbol BIG has about a clear trend break out as you could get. Just wondered what you thought

    Reply
    • Hi Dave–you are right – I do try to avoid individual stock questions from readers, as it would become an onerous task.
      I did look at the stock–it is looking like a vey nice bottom breakout–interesting!
      You can also write BNN an email, and when I am on MarketCall next (Feb 15th) I can answer on the show.

      Reply
  • The fun part of technical analysis is that there is something for everybody. Your thesis about Canadian banks is no doubt correct on a risk analysis basis. But the chart included would suggest the next stop for ZEB.TO might be $19.20 or $19.30. And, the 20 MA is as fine a trendline as you might see anywhere. Not shown in this chart is the 2011 timeline you use, but the Stockcharts chart shows present values at all time highs.

    http://stockcharts.com/h-sc/ui?s=ZEB.TO&p=D&b=5&g=0&id=p10360624893&a=284365511

    Reply
    • Hi Fred
      The timeline on the chart is from January 2011. And yes, the stockcharts version shows a new high–which from a pure price perspective is incorrect. Stockcharts adds back the distributions which alters the performance and chart levels. The Thomson chart is a pure price chart–distributions not included. I’m going to stay with the Thomson chart on this one, even though its true that with distributions, from a rate of return perspective, you are ahead of the April 2011 highs right now. To me, tech resistance s/b based on prices, and nothing else.
      And yes, the MA’s are still bullish–but they lag before showing a break, so its a matter of how you use the charts. In this case, i made lots of money on the banks, so I’m happy to take it and leave.

      Reply
  • Keith, to get a handle on how distributions affect prices, I wrote StockCharts and here is their answer: “Splits, distributions and dividends are “artificial” changes in the price of a ticker symbol that create gaps on technical charts causing misleading signals from technical indicators. To eliminate those gaps, we decrease our historical prices (and increase our historical volume data) in a way that removes these misleading signals.”

    It would seem to me from their answer that they disagree with you – that to ignore distributions in a chart is artificial.

    If their is a disagreement here, who is right?

    Reply
    • Fred–I dont know who’s right on the chart issue. Perhaps they are. I do think that investors pay more attention to stock prices and sometimes forget the distributions.
      But i do know that the banks are down since I sold, and I bought in July at the right time. So, I’m happy with the decision no matter how wrong or right I am about the methodology to make that decision.
      For a laugh– from my early stockbroker days was one of those guys who used astral-cycles to calculate stock movements. He would says something like “Jupiter is aligning with Mars right now, so the market will go up for two weeks”. I always felt that was a wee bit flakey. but he was dead serious, and once even gave a lecture at the CSTA on his methodology.
      Having said that, he seemed to deliver profitable trades to his clients back then.

      so–perhaps Venus is aligning with Mars, which will drive bank stocks lower. Or something like that.
      Either way, so far, so good.

      Reply
  • I was not aware of the difference distributions would make on StockCharts. It seems that, for a more complete picture in the quest for stock market riches, one must consult even more sources.

    Thanks for your input – always appreciated.

    Reply

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