The ASX 300 Banks Index jumped sharply this week as investors made a bold move into the big four banks. Banks have been under the pump for months, with plenty of negative publicity from the Royal Commission accompanied by media coverage of falling house prices. The Aussie Dollar also rallied, suggesting the buyers were offshore.
Have they got it right? Only time will tell. Trying to catch a falling knife is a hazardous endeavor. What looks cheap at the time often ends up being very expensive with the benefit of hindsight.
Bulls would say that the banks are a dominant oligopoly, generating strong cash-flows and un-threatened by international competition. Bears would say they are under-capitalized, poorly managed and sitting atop the mother of all housing bubbles. Technical analysts would say that the Banks index remains in a primary down-trend and this is most likely nothing more than a secondary bear market rally.
But there are broader implications. The bank rally lifted the ASX 200 through resistance at 6150, signaling another primary advance. A Trend Index trough at the zero line flags buying pressure. Target for the advance is the October 2007 high at 6750.
This looks like a bold play by a long-term value investor, taking advantage of the weak Aussie Dollar and strong bearish sentiment towards banks. Where one leads, others are likely to follow.