Why is it that the banking stocks head higher as interest rates rise? More importantly, after such an amazing rally why would they continue even higher still? There are two types of market participants (mostly), the technicians (those who use charts, and historical price movement to predict the future), and the fundamentalists (those who use company performance and earnings to predict the future). Right now the technicians are shouting from the roof tops that the market, along with financials are over bought, and extended at this point. They have been calling for shorts or to close longs for quite some time. The fundamental traders are happy as can be because what is extended to technical traders is still a value to the fundamental traders. Today we focus in on the financials and share why the fundamental traders are still attracted to banks, despite the sharp rally.
So fundamental investors tend to look at book value for banking stocks. The financial stocks mostly trade between 1 and 2x their book values. Naturally, if there is a stock trading below that it would be attractive to investors. Zooming in a bit further the price to book value looks at the current price of the stock relative to its book value. This metric is usually used to compare one financial stock to another to see where they measure up. If you were to find that a company is trading lower than its book value then it may be a discount or it may be a reason to look for warning signs. Many banking stocks were trading below their book values simply because of low interest rates.
In a quick comparison over the last ten years we could determine that Wells Fargo
Now, currently Citigroup
