The Way Forward For US Banks And The US Financial Sector

The XLF is the largest US investment bank ETF.  It's surprising that Berkshire Hathaway (BRK) is its largest holding along with WFC, JMP, C and BAC.  BRK and WFC have been the best performing in the sector by far (BRK owns a large percentage of WFC).

From a technical perspective, the easy money has been made as it has run into significant overhead resistance that was established in the decade prior to the financial crisis.  I think XLF is an excellent long term hold, however, choppy and sideways trading is likely the way forward.

There is still opportunity for upside in more speculative financial issues such as RF, KEY, STI and AIG.  Their long term charts illustrate the tremendous destructive force of the financial crisis, erasing in some cases equity built up over decades.  I generally use call options with issues as speculative as these.

The US financial sector now sits where the DOW did in the 1930s after the 1929 crash.  The waters may still be somewhat rough, but I think it's mostly upside from here.

Canadian vs. US Financials

The distance between key technical support and resistance levels post financial crisis is and should be more notable in the financial sector than any other sector. In March 2009, it really looked like the Financial Select Sector SPDR (XLF), which more or less tracks the US financial services sector, was going to zero. It bottomed at $5.73 in March 2009 and currently stands at $13.44. It is currently trading in a downward fashion toward support at ~$12-12.50. If this support level breaks significantly, there really is no other significant technical support in between it and the bottom.

The iShares CSN S&P TSX Capped Financials Index (XFN.TO), which more or less tracks the Canadian financial services sector, appears to be in much better shape than its US counterpart but has the same support gap problem. Support exists around ~$19-20, but below that who knows? One would have to look back to 2004 to see a small trading range where some support may exist around $17.

I think both of these charts are going to be restricted to large trading ranges for months. The XLF faces tremendous resistance at $20 and will only break through it when a strong recovery is underway.

Manulife

Before the financial crisis, the investment community used to use words like "conservative" and "value" to describe the financial services sector, which includes the big banks and insurance companies. I think it is now appropriate that words such as "volatile", "speculative" and "casino-like" be used in financial service sector mutual fund and ETF prospectuses.

Fortunately, I've never been really interested in the financial services sector due to the fact that I'm more of a younger and growth oriented investor. I feel sorry for all of the yield chasing conservative investors who included companies like Manulife in their portfolio thinking it was a stable long term "conservative" investment.

Below is the chart of a company whose sector is often described as "volatile" or "speculative".