Community Bank Stocks Are Overvalued, Overbought
Of the 23 community banks, three have been downgraded to hold from buy, leaving us with eight buy rated stocks and 15 hold rated stocks.
My benchmark for community banks is the America's Community Bankers Index (ABAQ) , which represents 389 publicly-traded community banks.
The weekly chart for ABAQ (181.59) is positive but overbought with the five-week modified moving average at 176.22 and the 200-week simple moving average at 155.43. ABAQ is below its April 2010 high at 184.90. My quarterly value level is 158.71 with a monthly pivot at 181.63 and weekly risky level at 188.42.
Chart Courtesy of Thomson/Reuters
The finance sector is 17.0% overvalued with the banks-northeast industry 26.7% overvalued, the banks-southeast industry 12.7% overvalued, the banks-midwest industry 3.7% overvalued, the banks-west industry 3.9% overvalued and the finance savings and loan industry 28.5% overvalued.
On Dec. 5, I wrote, FDIC Reports Positive Banking System Data where I presented the data and my analysis of the FDIC Quarterly Banking Profile for Q3 2012. I concluded that while the banking system has been reducing exposures to bad real estate loans, the exposures among community banks remain large by longer-term standards.
Then on Dec 11, I wrote, Construction and Development Loan Exposure Continues to Plague Community Banks where I last profiled the community bank stocks I am profiling today.
My suggested strategy for these bank stocks is to book profits on strength to risky levels. With an unfavorable risk reward a suggested allocation to these names should be reduced by at least 50%.