Is it time to be buying big bank stocks? This is probably the most asked question in recent months after the sector suffered a big beating in the wake of the Banking Royal Commission and the slumping property market.
The big bounce in the sector over the past few days is certainly adding to optimism that we may have seen the worst of the bank stock sell-off with the Commonwealth Bank of Australia (ASX: CBA) share price, Westpac Banking Corp (ASX: WBC) share price, Australia and New Zealand Banking Group (ASX: ANZ) share price and National Australia Bank Ltd. (ASX: NAB) share price rallying between 1.4% and 2.9% over the past week.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index has only eked out a gain of 0.1% over the same period.
The most important "buy" signal is yet to flash
I think the sector is close to a buy but I am holding myself back from adding to my severely underweight bank positions.
As I've been saying over the past year or so, the time to jump back into the banks is when the pace of declines in the housing market is decelerating.
To be clear, I am not looking for house prices to rebound before buying as that will be too late. I just need the rate of decline to ease as that will mark the halfway point of the housing slump.
The data so far is showing very early signs that we could be approaching such an inflection point and the upcoming bank reporting season will be the most important one for the sector in the past few years, in my opinion.
3 reasons to wait
Investors like myself who have been underweight on banks wouldn't have been too concerned about the big four's earnings in the past. But if my guess is right, May or June could be the ideal time to buy into the sector and there are a few reasons for this.
Firstly, I think we will start to see signs of a trough in the rate of house price falls. There have been reports that a wave of new apartment sales is expected to hit the market in the near-term and we should get better clarity of how the market is managing this reported glut in the next two months or so.
The other reason to wait before jumping into the sector is the risk that earnings updates from the big four could disappoint, which could put pressure on their share prices.
I am not counting on big disappointments. I think we will see ongoing weakness but nothing too dramatic that would worry me.
But if bank stocks continue to rally into May, they would be particularly sensitive to any bad news. The bounce in the sector we are seeing now may be driven by "buy the rumour, sell the fact" investors and dividend hunters looking to lock in their franking credits, which are subject to the 45 day rule.
Finally, the reason why I am waiting is because I am anticipating weakness in the broader market in May due to seasonal factors. May is typically is a weak month for stocks and I am anticipating this trend to emerge this year because of the very strong first quarter rally on our market.
Waiting till May or June will give me a chance to buy into any dip while I get the chance to see if there is really a light at the end of the housing market tunnel.
