Financial Stock Follow-up

I was checking out some stock charts last night and watching Fast Money when I remembered back to one of my first few blog posts.  I mentioned very briefly that I thought financial stocks would do very well this year, with the momentum they had starting around the September 2010 time frame continuing.  I wanted to follow-up on that with a few tips that I think anyone can benefit from. 

I had previously purchased two bank stocks, Citigroup (C) and Huntington Bank (HBAN) a while back in 2009.  Additionally, I purchased one of the main financial stock ETFs (XLF) in November of 2010.  An ETF is nothing more than a collection of similar stocks all rolled up into one.  For example, if you like the financial stocks like Bank Of America, Wells Fargo, JP Morgan, etc. You can either buy them individually, or if you want to reduce the risk of owning the individual stocks, but think the overall sector will do well, you can buy the symbol XLF instead.  Rather than go into more detail on that, I'll have a separate discussion on ETFs and some of the common ones out there in a separate post.

So, going into January, I was feeling pretty good since they were all doing well compared to where I bought them.  But a key thing to remember is that things can change rather quickly.  Never be so set in your ways that you can't change your outlook once the overall picture changes.  You may firmly believe that things should go up, but price is king and if it's going in the wrong direction, take your gain or cut your loss and move on to the next trade.

I ended up taking my gain on all 3 in Feb/March. Turns out that was a good move in hindsight, since all 3 have gone down substantially since then. I was out and haven't looked back. My outlook did a complete 180 shortly afterwards. With all the new banking regulations and anti-bank sentiment by the government, there appears to be no end in sight to the downturn. At some point they will be a value, but until there is more clarity on the upcoming Dodd/Frank regulations, a turnaround in the housing market, or an about face on the constant daily rhetoric from the goverment about the 'fat cats on wall street' or the vilification of all the banking executives, it's a wait and see situation.

As a result of finishing the one Trend Trading book and getting 1/2 way through the other, I have changed my trading system a bit. One of the most important new parts is that whenever I enter a trade, I must know my desired sell price on the upside as well as my sell price to limit any potential loss on the downside. That is called a stop limit order. That is really the most important part, to limit your losses if things don't go as planned, so that you can live to fight another day and can move on to the next trade.

For example, my pick for this week on SpikeTrade.com was Qualcomm. My entry price for the pick was 54.93, my target sell price was 56.36 and my sell price on the downside was 53.97.  It would automatically sell at 56.36 on the upside and would automatically sell at 53.97 to limit the loss on the downside. In that way, you also take most of the emotion out of the trade, an important factor so that you don't trade on hype.  Stick with your plan that you setup before you entered the trade and just set it and forget it.  I'm finishing up this post Tues morning and it just automatically sold at 56.36 on a gap up at the market open.  Positive news from IBM and other companies overnight Monday helped spark a rally. 

I just wanted to make sure you're aware I haven't been positive on the financial stocks as an overall sector since March, but again that can change on a daily basis.  One of the stocks on my radar is actually Prudential Financial, the insurance company and I may enter that trade tomorrow depending on the charts.  That just highlights that a blog is a difficult place to express a market/stock opinion, since things change so rapidly.  I also wanted to highlight the importance of having an upper AND lower sell price on a stock trade, PRIOR to placing the order to buy. Hope that helps! As always, leave a comment or let me know if you have any questions since I'm always interested in talking stocks.  Happy Trading!

Posted in: financial stocks , stop limit orders