What will you do if you know the stock you own is “fairly valued”? Sell! That’s what Meredith Whitney, bank analyst, recommended.

I owned Goldman Sachs (GS) shares and I still have some stock options on Goldman Sachs. I was planning to unload them just before Goldman Sachs’s earning announcement on October 15th. I am late by two days, Meredith slapped “neutral” rating on Goldman Sachs today and the stock fell by 2% to $186. I sold all my shares this morning and put tight stop in option positions.

Meredith Whitney said she now believes bank stocks are “at least fairly valued.” and downgraded Goldman Sachs from “buy” to “neutral”. Neutral is the nice way of saying “Sell” in Wall Street.

Ms. Whitney, whose bearish calls on large bank stocks gained renown during the financial crisis that erupted last year, said in a note she is now “far less bullish” on banks than last quarter and urged clients “either to take profits or go neutral into the next two weeks.” She also lowered her earnings outlooks for Bank of America (BAC) and Citigroup (C). Panic set in now. Even the banking stocks like J. P. Morgan Chase (JPM) fell 1.8%.

If you own banking stocks and had decent profits in the recent run, you may want to unwind some positions to protect your profit. Major U.S. banks report earnings this week starting with J.P. Morgan Chase tomorrow. Goldman Sachs and Citigroup report on October 15th. Bank of America will announce earnings on October 16th.

Take your profits when you can!

Related Links: Goldman Sachs Downgrade | Caution: Banking Stocks Ahead

Disclaimer: I own stock options in Goldman Sachs.

I warned about banking stocks one month ago.  At that time Citibank was trading at $3 and Bank of America was trading at $5+. I warned that the price could go lower. Bank of America went down to $2.53 before recovering to current $4 level. Citibank went down to $1.61 before coming back to $2+ level. I have never seen banking stocks this volatile in my career.

I don’t really worry about nationalization of these two banks – Citibank and Bank of America. Contrary to public fear, nationalizing these banks for short period of time will do good for the economy. You can also get rid of people that put the country and its economy in great danger. Nationalization is no longer about economy. It’s politics now. Anything can happen in the next few weeks.

If you are a hard core trader, you may want to play bank stocks to use the volatility to your advantage. If you are not, then better stay away fom bank stocks such as Citibank and Bank of America. Things can change suddenly and quickly. If you are not careful, it can wipeout your entire savings.

Disclaimer: I do not own any stock mentioned in this blog post.

Today, Bank of America’s stock is up 13%. Citibank is up 10%. It looks like these stocks are really cheap, isn’t it? Yes, they are. Only problem is that they may go even cheaper.

Analyst firm Friedman, Billings and Ramsey came out with some bearish opinions on the banking sector yesterday. They said that Bank of America might have to raise an additional $80 billion in capital by selling more stock. FBR was also concerned that Wells Fargo will have to drastically reduce its dividend and that it may also need to raise capital by selling more stock. All of this negative news took toll on the banking sector yesterday. It may be a sucker’s rally today, it’s better not to get in there even when the 10% per day return is dangling in front of you.

Here is my problem with the banking sector. These guys are not telling the truth. I doubt whether they even know the full extent of their internal problems. Bank of America at $5+ and Citibank at $3 look very attractive. But, it’s prudent not to get lured by these numbers. Just wait out until the fundamentals improve.