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"Banking" On A Rally?

It's happening again: banks have sold into earnings season, and are rallying now that it is mostly over.

While the S&P has posted healthy gains of about 5 percent in the past 5 trading sessions, the Bank Index is up about 12 percent in the same period.

Why?

Because traders have found a successful trading pattern: buy banks as their earnings reports are ending, and sell them a few weeks later.

For the past five quarters, banks have followed this pattern.

Two important points:

1) Rallies in bank stocks post-earnings have been notable but short-lived. Peak to trough rallies have lasted anywhere from a few days (in the case of Oct. 2008) to two weeks (in the case of the rally in January 2008) to two months (in the case of the July-Sept. 2008 rally), but not longer.

2) In all cases, subsequent losses have exceeded gains. In other words, it has not been profitable to hold bank stocks for any more than a few weeks after earnings season is over; their rise post-earnings is invariably followed by a fall.

Eventually, this trade will play out. Bank stocks will stop declining a few weeks after their earnings come out, and this trade will no longer be profitable.

But I'll bet we are not there yet; not for this quarter.

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