Berkshire Dumps Bank Stocks, Should You?

In a filing on Friday, August 14, Berkshire Hathaway, Inc. BRK.B (BRK-A) reported some significant changes in their holdings that are likely to get the market’s attention next week. The most significant changes were in the financial sector.

The positions in Wells Fargo (WFC WFC ) and JP Morgan Chase JPM (JPM) were reduced significantly, while the long-held positions in Goldman Sachs (GS GS ) was eliminated. The filing also confirmed the sale of the firm’s airline position in May which caused many to criticize their chairman Warren Buffet as the stocks have mostly risen since May.

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A review of the year-to-date (YTD) sector performance reveals that the Financial Sector Fund (XLF) XLF is the second-worst performer of all the major sectors, down 17%. However, on a relative basis, XLF is still doing much better than the Energy Sector Fund (XLE) XLE which is down 34.1%.

These two sectors are often the focus of value investors. As I have noted previously, value stocks have had a rough time when compared to growth stocks. The is very evident in the weekly spread chart of the iShares Russell 1000 Growth (IWF) IWF versus the iShares Russell 1000 Value (IWD) IWD , which has been rising in dramatic fashion for most of the year.

The spread peaked in early July as several of the large tech stocks formed key reversals. The spread rebounded, but has still not yet made another new high. A decline below the mid-July low would be a good sign for value investors.

The Moving Average Convergence-Divergence (MACD) is now very close to dropping below the signal line and the MACD-Histogram has formed a negative divergence (line a) and is now close to dropping below the zero line.

A similar outperformance by growth stocks was observed in 2000, before topping out. It is too early to suggest that a major top has been formed, but it is unlikely that the growth-over-value trend will last forever. Berkshire Hathaway has a long-term investment outlook, so this growth/value analysis suggests that in a year’s time these sales may not be viewed favorably. The company did keep their relatively large position in Bank of America BAC (BAC), and their largest position is in Apple, Inc AAPL . (AAPL).

The weekly chart of Wells Fargo & Co. (WFC) shows some signs of bottoming, as it formed a doji last week just above the monthly pivot at $24.71. A weekly doji is considered a sign of indecision in the market, as the closing price is very close to the week’s opening price. A doji buy signal will be generated if WFC closes above $26.14, which was the doji high. There is strong weekly resistance at $33.62 (line a).

The weekly relative performance (RS) is still declining and below its weighted moving average (WMA), which is a sign that WFC is performing weaker than the S&P 500. The on-balance-volume (OBV) turned positive last week, as it moved above its WMA.

The newly reported Berkshire investment in Barrick Gold (GOLD) was even more of a surprise to many investors than the sales of bank stocks. In the past, there have been comments where Buffett had argued against gold, favoring US companies instead of precious metals

GOLD was down 6.5% last week, which was suggested by last week’s analysis, as the gold futures had formed a daily reversal. The stock gapped lower on Tuesday as the daily starc- band was quickly tested. As of Friday, the GOLD closed at $26.99.

There is strong support now at $23.81, which corresponds to the 32.8% Fibonacci support level of the rally from the March 12 low of $12.61 to the August 5 high at $30.69. The daily OBV had been in a positive trend (line a), which was broken last week. The volume was especially heavy on Tuesday, August 11, over double the daily average. The OBV is also below its WMA, so the volume will need to be watched closely on any rally. GOLD was up over 2% in after hours trading Friday after news of the Berkshire purchase was released.

As for the rest of the stock market, all of the major averages finished the week higher, led by a 3.6% gain in the Dow Jones Transportation Average. The Dow Jones Industrials gained 1.8%, which was much better than either the S&P 500 or Nasdaq 100 NDAQ . On the NYSE there were 1956 issues advancing and 1122 declining.

The weekly chart of the Spyder Trust (SPY) SPY shows that it has traded higher for five of the past six weeks, closing 7.6% above the 20-week exponential moving average (EMA) at $320.71. The close was 4.9% below the weekly starc+ band at $352.83. The S&P 500 Advance/Decline line made another new high last week as it continues to trade well above its rising WMA. There is more important A/D line support at the uptrend (line a).

There is a full slate of economic data next week, and I will be interested in Monday’s Empire State Survey which has rebounded nicely from the April lows. It is likely to improve further in August’s reading. On Thursday, the Leading Economic Indicators should give us a wider reading on the state of the US economy.

I continue to have a rather conservative outlook on new positions as we get closer to September. On establishing new positions, a close proximity to major support along with a bullish technical outlook should be the primary considerations.

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