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Have financial stocks hit bottom?
It's always hard to call the low but very profitable if you call it right. Here's how to make your best guess
Dog Pound / Robert Walberg4/21/2008 12:01 AM ET


Buy 1,700 shares of TradeStation Group (TRAD, news, msgs) at the open.

Buy 100 shares of Goldman Sachs (GS, news, msgs) at the open.

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It's never easy to figure out when a sector has hit bottom, but one early indication occurs when the group rallies into bad news. Take housing stocks, for example. After the market tore the industry down for most of 2007, the group started to bounce back in October -- even though the news cycle remained decidedly negative.

Such a move is often attributed to short-covering, and in some cases that's all that is taking place. However, these counterintuitive rallies can also signal the start of a sustained and powerful recovery. How to tell the difference?

First, check the volume numbers to see if the stocks in the group are rising on increased volume (daily volume exceeds average daily volume over the last 10 or 30 days). If not, then the bounce might very well be more about short-covering than any change in market sentiment. However, if the volume numbers start to improve, it could be go time.

You will also want to see how the sector reacts on subsequent retreats. If you get a series of lower lows and higher highs off the bottom, then you are on to something that is likely to last. Returning to the housing sector for a moment, you can see that stocks like Ryland (RYL, news, msgs) and Toll Bros. (TOL, news, msgs) have followed this very course, and investors that bought in November were rewarded.

I bring this up because the financial stocks are starting to do the same. The news remains dreadful, yet we are seeing buyers emerge on the bad news. Again, these stocks were heavily shorted, so it could all be a short-covering-led bounce. But volume numbers are starting to improve, and the recent setback (over the past 10 days or so) did not take the group to new lows.

Citibank (C, news, msgs), Bank of America (BAC, news, msgs), Capital One (COF, news, msgs) and Goldman Sachs (GS, news, msgs) are all names that could be poised for considerable gains over the next three to six months.

It can be difficult to buy stocks when the news is bad and the prevailing sentiment is negative. But the rewards for doing so are often substantial if your timing is good.

With earnings season more than halfway over and the market holding up relatively well, I'll take this opportunity to start reloading by adding 1,700 shares of TradeStation Group (TRAD, news, msgs), a leading online investment company that is trading at ridiculously low levels considering its performance history and its balance sheet.

I'll also add 100 shares of Goldman Sachs. Both transactions should be executed at Monday's open.