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Bank Stock Index Approaches Long Term Support

If you look at the chart above (courtesy of Alan Farley), you will see that the BKX bank stock index is heading to a long term support level that goes back to 1998. If this level can hold, then we are likely at a point where you can safely start to selectively buy the financial stocks that are the equivalent of the baby being thrown out with the bath water.

There are some good financials that have gone down simply because the entire industry has sold off, and you likely should be able to buy these and make a profit from them. That said, there will be many others that will continue to devalue based upon balance sheet problems.

Selectively, companies with strong franchises that do not have exposure to subprime mortgages and that are protected from a slowing in the commercial real estate market (by good lending standards, diversification, etc.) should provide long-term value at today’s prices. Historically, when there has been a banking crisis, and you have been able to buy qualtiy companies at 70% to 90% of tangible book value, and make significant returns.

We will be watching this closely to see if the support levels hold. If they do, we will be choosing some key players to buy as the index returns to higher levels.