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Can You Take Profits From the Financials?

By Tobin Smith

Save the Date

It's an overused cliché, but we saw the "perfect storm" of bad news on July 15, as that was the day everything hit the fan.

General Motors (GM) sank below $10 and suspended its dividend. June retail sales were disappointing, the producer price index (PPI) number increased and the U.S. dollar hit a new low against the euro. Plus, we couldn't avoid reports about IndyMac (IDMC) customers lining up around the block to withdraw what was left of their deposits from the failed bank.

The financials also took a beating that day, with double-digit sell-offs in Citigroup (C) and Wachovia (WB), while the Financial Select ETF (XLF) traded record volumes. The XLF traded 469 million shares that day -- a record that held for two days until 528 million shares were exchanged on July 17.

So many bank shares were traded that roughly 70% of outstanding shares were sold. This means we have a new class of shareholders in the financials that are investors, not traders. Combine this with the temporary SEC regulation forbidding naked short selling on several financial stocks, and you can see a new level of stability in the sector.

So, again, if you're a short-term trader who has an investment horizon that's measured in weeks, this ain't for you (try our ChangeWave Shorts service instead).

But if you have a sufficiently long-term investment time horizon of a year or more -- and understand that earnings power ultimately drives stock prices -- you'll realize that the time to buy the best of the financials is near. Do your job correctly and you could be in line for 200% to 500% profits down the road.

The key, of course, is to identify the survivors.