Stocks in the financial sector have been red-hot of late. In fact, the gains in many of the largest and most-prominent banking and brokerage companies have been on fire, particularly during the past month, and especially during the past week.
So, what's the reason for the big spike in financials?
Well, one key factor was last week's announcement by the European Central Bank (ECB) that it was set to begin a bond-buying plan to help lower struggling euro zone countries' borrowing costs. The move was described as a "fully effective backstop" by ECB President Mario Draghi, and it's just such an announcement that traders were waiting for to confirm their buying in financials.
The other major catalyst for a move into financials lately is the expectation that the Federal Reserve will institute yet another round of quantitative easing, or QE3, as soon as this Thursday. That's when the central bank concludes its FOMC meeting, and the smart money is betting that the Fed will come through and do what Wall Street wants, and that's give them even greater access to cheap capital. That access is amplified in the financial sector, as banks and brokerages use the Fed as a fiscal lifeline to easy money.
There's an old adage on Wall Street that says, "Buy the rumor, sell the news." After the news of the ECB's announcement, we certainly didn't get a sell-the-news move in financials. However, I suspect that if the Fed does what most think it will, and implements some type of bond-buying scheme interpreted as QE3, then it could be the beginning of a sell-the-news wave in financials.
That said, here are four overbought financial stocks you should consider selling now:
1. Morgan Stanley (NYSE: MS)
Shares of the brokerage and investment giant have been near the top of the performance list during the past month, spiking a whopping 18% (through Sept. 11). In the past week alone, shares of the iconic Wall Street firm are higher by 11.2%. I doubt if this stock can maintain this pace much longer, and as such, traders should get out while the getting's good.
2. Bank of America (NYSE: BAC)
The retail banking behemoth has enjoyed a very nice move to the upside during the past four-plus weeks, posting a scintillating return of 16.7% in the past month. The stock has been the top-performing financial issue during the past week, with shares spiking 12.9%. That pace is definitely destined to cool, so sell BAC now before it gives back its gains.
3. Goldman Sachs (NYSE: GS)
This investment banking and brokerage stalwart has also joined the month-long party in financials, with its shares surging 13.3% in the past month. Over the past five trading sessions, its shares have jumped nearly 9.7%. Like the other high-profile financial stocks you should sell now, the move in GS shares above key short- and long-term technical markers has been much too fast to be sustainable.
4. Citigroup (NYSE: C)
This uber-volatile banking giant's shares have seen more than their fair share of tumult in recent years, but the latest move in the stock has been substantially higher. Citigroup stock is up 13% during the past month, and during the past week, we've seen shares catapult nearly 10%. That's a move unlikely to continue, particularly after the Fed makes its intentions known later this week. As such, it's time to sell Citigroup.