Banks To Bounce?

This story features WESTPAC BANKING CORPORATION. For more info SHARE ANALYSIS: WBC

By Michael Gable 

In the last few days the talk has been of the switch from banks to resources, yet yesterday we saw the opposite price action occur. It does appear as though from a medium to longer term point of view, banks will slow down here and resources will potentially produce more upside. Over the next few weeks though, I think we will see the opposite occur where the banks can stage a short term rally and resources will remain under pressure. While everyone is seemingly focusing on the banks, the safer sector that should do well over the next 6 months are industrials with US dollar revenues. The US economy is looking more promising now compared to Australia and with a favourable currency translation, companies with that sort of exposure should continue to outperform here.

I was at a seminar yesterday hosted by the large US fund manager BlackRock. Some key points that I was able to take away include:

– On a time frame of at least 18 months, equities are at fair value while bonds and fixed interest are overvalued.
– If QE were to cease, 10 year bonds should be about 1% higher.
– Profitability of US corporations is at a 45 year high.
– Japanese equities, despite the recent rally, are still very attractive and they have a government in place with enough power to get things done.
– When QE slows down and eventually stops, bond yields will rise and the most vulnerable assets are those which investors have used as a substitute for bonds.

Given the last point, investors may be wondering what to do with their banking shares. I’ve covered Westpac ((WBC)) as an example with some options on what can be done to protect the downside.

Westpac

The banks, including WBC, have been sold off very heavily since peaking last month. The major cause is the falling $A where overseas investors are looking to bank profits before they become eroded by the currency translation. With the heavily oversold condition on the daily chart, and the yield support, I would expect the banks to stage a small rally here, retracing approximately 50% of the recent falls. For WBC that takes it up towards $32. From there I would expect it to remain under pressure. It could either then drift back towards $29 or a worst case scenario for me would see the stock down near $26.

Potential Strategy*

If you are looking to lighten off on banks, then the upcoming bounce could be your opportunity. However, if we want to hang on but protect the downside, then the bounce will give investors an opportunity to write a covered call to protect the downside. Alternatively, if you are underweight banks, you can use these levels as a buying opportunity and then write a call options against the shares once they have rallied.

*This strategy contains unsolicited general information only, without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this document, having regard to your objectives, financial situation and needs and consult your adviser.

Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).
 
Visit Michael Gable's website at  www.michaelgable.com.au/.

After leaving Macquarie Bank's Securities Group in 2008 after many years of service, Michael has gained a highly regarded reputation in the financial services industry. As a Private Client Adviser with Novus Capital, Michael has become a popular live commentator and analyst for Sky News Business Channel’s “Your Money, Your Call” program. He is also the author of the weekly stock market report “The Dynamic Investor”.

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management.

Michael deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (Rep. No. 376892) of Novus Capital Limited AFSL 238168 ACN 006 711 995. Michael Gable and Novus Capital Limited, their associates and respective Directors and staff each declare that they, from time to time, may hold interests in securities and/or earn brokerage, fees, interest, or other benefits from products and services mentioned in this website. This website may contain unsolicited general information, without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this website or the Product Disclosure Statement (PDS) or Financial Services Guide (FSG), having regard to your objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance. Michael Gable and Novus Capital Limited believes that any information or advice (including any securities recommendation) contained in this website is accurate when issued but does not warrant its accuracy or reliability. Michael Gable and Novus Capital Limited are not obliged to update you if the information or its advice changes. Michael Gable and Novus Capital Limited and each of their respective officers, agents and employees exclude to the full extent permitted by law, all liability of any kind, in negligence, contract, under fiduciary duties or otherwise, for any loss or damage, whether direct, indirect, consequential or otherwise, whether foreseeable or not, to the extent arising from or in connection with this website.

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