Skepticism in Fifth Third Bancorp (FITB) Marks Good Contrarian Opportunity

01/22/2010 12:01 am EST

Focus: STOCKS

Nick Perry

Equity Options Trader, Schaeffer's Investment Research

It looks like Fifth Third Bancorp (FITB) could be in the process of staging a longer-term turnaround. The weekly chart shows steady progress, but the sentiment indicators show signs of skepticism. To a contrarian, this is an encouraging sign. Here's a look at the data, starting with the sentiment profile.

There are three points to note here:

  1. The lack of enthusiasm from analysts
  2. The rise in the Schaeffer's Put/Call Open Interest Ratio (SOIR)
  3. The decline in short interest

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In terms of understanding the sentiment, the buy/sell/hold ratings may be the most straightforward. In a nutshell, most of the analysts are on the sidelines when it comes to Fifth Third. This is an encouraging contrarian signal as it suggests there is still potential buying demand on the sidelines. Getting a read on the SOIR is slightly more complex due to a spike related to expiration. However, in general, the ratio has been trending higher.

The decline in short interest may seem like a puzzling point to highlight, unless of course you are a regular reader of this space. I have been noting a number of interesting situations where we have seen short sellers jump from the bearish camp ahead of analysts. This point was touched on earlier in a post about F5 Networks.

While low short interest doesn't represent much in the way buying demand, it does suggest a potential shift in sentiment. While a huge influx of optimism can be a warning sign, the early and middle stages are often the sweet spot of an uptrend.

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The weekly chart above shows the push through congestion that began with the breakout noted earlier this month. Even more interesting is that we have a positive reaction to Fifth Third's earnings report.

By Nick Perry of Schaeffer’s Trading Floor Blog

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