The Stock: Royal Bank of Canada
The Trend
Retail investors looking for a strong card to play should be drawing on Canadian banking stocks. February was a positive month for the financial sector with already bullish bank shares rallying off trend line support and hitting 52-week highs, while laggard bank stocks such as Bank of Montreal staged a push through trend line resistance.
The robust outlook for the Canadian banking sector is reflected in the recent performance of the BMO Equal Weight Banks Index ETF . Although a relatively new trading instrument (listed in 2009), this fund with equal weightings for each of the six major Canadian banks cracked new 52-week highs every week of the past month. The fund price is up 7 per cent in the past month - better than the 5-per-cent gain logged by the broader blue chip S&P/TSX 60 index over the same period.
The financial sector makes hay when the monetary environment allows for a profitable spread between short-term and long-term rates. Long-term rates have been rising since early in the fourth quarter of last year, a move that is inversely reflected in the bearish trend of the iShares DEX Long Term Bond Index ETF and other bond funds. Strong fourth-quarter 2010 economic performance reported this week adds pressure on the Bank of Canada to lift short-term rates, a factor that raises questions about how the consumer and businesses will fair going ahead. Judging by investors' demand for bank stocks, the answer must be: just fine.
The Trade
This column returns to RBC eight months after a bearish profile advised market timing investors to take to the sideline when shares traded around $51. After its summer slide, the stock did rally to a high of almost $57 in October, just prior to the end of the company's fiscal year-end, but shares retreated again to a low of $50.78 by Christmas - a flat six-month performance while sporting the Stock Trends Bearish indicator. However, after the recent rally of bank stocks, RBC has closed out its Stock Trends bearish trend and is now a Bullish Crossover. This is the tenth time this stock has had a bullish moving average crossover since 1995, with the bullish trends that followed averaging about 65 weeks in duration.
The last four RBC bullish trends introduced by the Stock Trends moving average crossover resulted in an average 33-per-cent share price advance to the trend peak. The bearish call on this stock was largely a trend notice of downside risk. With Royal about to declare first-quarter fiscal results, this bullish Stock Trends signal is notice of upside potential ahead.
The Upside
As the share price trades above $57 - clearing the price resistance level that retarded the stock's rally last autumn - new price objectives blossom for RBC shareholders. Look for the stock to clear the 2010 peak of $62.89 as the banking sector gains traction.
The Downside
Spring may be in the air for bank stocks. Are dividend hikes in the offing? But an economy too heated, interest rates ticking upward, high gas prices taxing the wallets of consumers - these are the risks that might become apparent if the stock drops significantly below $52. Still, there are few investments as golden as a bullish trending bank stock.
Skot Kortje has been analyzing stock market trends for 15 years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca
Skot Kortje