What are we looking at?
Canadian and U.S. financial stocks.
The screen
We limited our pool to the S&P/TSX 60 Index and the S&P 100 Index.
To find the most promising, we looked at each stock's 40-week moving average (40wMA). This is the average closing price for the stock over a period of 40 weeks. Charting the moving average week by week gives us a sense of investors' behaviour. Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock? Generally speaking, stocks that trade above their rising 40wMAs are the best candidates for investments; they are the ones that show a bullish pattern.
We chose this indicator because stocks tend to stay relatively close to their 40wMAs. When stocks rise far above this average, investors often use this as an opportunity for profit-taking, since this usually leads to a price correction toward the 40wMA. Similarly, when stocks decline far below this average, suggesting a change in trend, investors can usually expect a recovery rally to follow toward the average, which also provides a selling opportunity.
More about Phases & Cycles Inc.:
Phases & Cycles Inc. has been providing independent research for over 24 years, using behaviour analysis. It publishes investment ideas for both the Canadian and U.S. equity markets. Its research reaches more than 1,000 users across North America and Europe.
What did we find?
There are a total of 25 financial stocks in the S&P TSX 60 and the S&P 100 Indices. Nine of these are trading above their rising 40wMAs. Among these, two stocks are significantly extended and could pull back toward their 40wMAs before resuming their up-trends; these are Brookfield Asset Management Inc. and Simon Property Group. Stocks currently at a more attractive entry level include: Power Corp. of Canada., Bank of New York Mellon Corp., Berkshire Hathaway Inc., Goldman Sachs Group Inc., Morgan Stanley and Wells Fargo.
A large number of stocks in the pool currently rest in a horizontal trading range and also show a flat 40wMA. These include AIG Inc., Bank of America, Bank of Montreal, Manulife, National Bank, Royal Bank, Sun Life Financial Inc. and Toronto-Dominion Bank. These stocks could become positive with a sustained rise above their averages.
The stocks that have a falling 40wMA and negative momentum could trade at lower prices and are therefore not recommended for investments at this time.
Readers should consult a professional before making investment decisions.
A more detailed list, covering a larger pool of financial stocks, can be requested by e-mailing info@phases-cycles.com.
Ron Meisels is the director of research and Monica Rizk is the senior technical analyst for Phases & Cycles Inc. (www.phases-cycles.com). They may hold shares in companies profiled.