Top Stocks In The Top Sector Of 2012

By Cory Mitchell | February 06, 2012 AAA

It may come as a surprise, but the hottest sector so far in 2012 is financials. The sector is up 13.28% according to Morningstar, and the Financial Sector SPDR (NYSE:XLF) ETF is up 9.9% year to date. With the overall sector performing this well, it is little wonder that some of the returns being seen in financial stocks this year are already huge - in some cases triple digits. To narrow it down, we will look at four of the top-performing large-capitalization financial stocks, all up more than 33% year to date.

National Bank of Greece (NYSE:NBG)
Those who took a risk on Greece in 2012 are being rewarded to say the least. The stock is up 106.67% this year, to $4.03 from $1.95. The ascent has been steep and the stock will need to take a breather at some point. The approaching 200-day moving average at $4.50, coupled with former resistance, could stifle the price in the short term. Yet, the RSI and on-balance volume indicators are both confirming the move higher. Ideally, purchases of the stock can be made on a pullback if it occurs. A drop below $3.25 could bring in selling and allow investors to pick up shares between $2.25 and $2.50 (in the region of the 50-day moving average). If this occurs, stops can be placed at $1.60, with a target of $5. In the short-term, the stock could go higher, but volume has been tapering off, even as the stock tests $4, indicating a short-term correction and potential buying opportunity may appear soon. (For related reading, see The 7 Pitfalls Of Moving Averages.)

Bank of Ireland (NYSE:IRE) is also a huge performer so far this year, up 77.9% to $7.81 from $4.39. Like NBG the stock has been surging higher in an aggressive fashion. The stock has struggled to hold above $8 and declining over the last two sessions indicates a pullback could occur. This presents a potential buying opportunity. If the stock pulls back, purchases can be made near the upward sloping trendline between $6.75 and $6.50. Stops can be placed near $5.75 and the profit target is $9. While volume is indicating a potential short-term pullback, on-balance volume, which is a longer-term indicator, is signaling a lot of underlying strength in this rally.

Bank of America (NYSE:BAC) is climbing the charts, up 35.34% to $7.85 from $5.80 at the start of the year. The trend has not been as aggressive as in the prior stocks mentioned, but this provides more trading options to investors. $8 is likely to be very strong resistance and result in a short-term pullback. Prior rallies ended at $7 and $7.50 and then proceeded to pullback 50 cents. If the $8 area turns out to be a short-term top, look to pick up shares in the $7.55 region, with a relatively tight stop. If the uptrend continues, the target is $8.45. A drop below $7 warns of likely larger declines. (For related reading, see The Utility Of Trendlines.)

Lloyds Banking Group (NYSE:LYG) is up 33.94% to $2.21 from $1.65. The $2.20 to $2.41 region has been a real sticking point for this stock, unable to breakthrough it to the upside since early August. The 200-day moving average is also currently crossing at $2.34, providing added resistance in this area. If the stock can move above this area, the upside could be significant, but that is a lot of resistance to overcome. Traders can wait for a breakout above $2.40 to enter a position. Alternatively, traders can wait for a pullback toward $2, with a stop below $1.85. In both cases if the stock can ultimately break through $2.40 the target is $3, and if that is cleared $3.40. (For related reading, see Support And Resistance Reversals.)

Note that Royal Bank of Scotland (NYSE:RBS) can also be included in this group, up 37.67% year to date, and was written about in last week's post: Stocks on Fire in 2012.

The Bottom Line
These four financial stocks have been on fire in 2012, but that does not make them easy to trade. Traders and investors need to be patient and wait for a proper time to purchase these stocks, when the potential downside risk can be minimized. These stock may experience pullbacks shortly, and that presents the buying opportunity. Stops should be used, because on a percentage basis, these stocks are quite volatile. Therefore, wait for a time to purchase when the reward is greater than the potential risk based on the support and resistance levels.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.

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