Bank stocks are sending a warning.
While the unstoppable bull market has pressed ever higher this week, bank stocks have been falling. And, since the action in the banks tends to lead the action in the broad stock market, we have yet another reason to be cautious.
Look at this chart of the KBW Bank Index (BKX)…
BKX spent the past two months tracing out a “rising wedge” formation on the chart. This is a bearish pattern that forms as a stock makes higher highs and higher lows, but the distance between the highs and lows narrows.
Most of the time, this pattern breaks to the downside – as it did this week with BKX.
Admittedly, many of the caution signs I’ve pointed out in multiple essays over the past two months haven’t done squat. The explosive setup in the Volatility Index (VIX), the low put/call ratio, the nearly unanimous bullish opinion of the financial television talking heads, bearish seasonality, absurdly high fundamental valuations, have all been rolled over by the persistency of the bullish momentum.
So, I won’t blame you if you roll your eyes as you read today’s essay.
But, the action in bank stocks is the “canary in the coal mine” for credit events. When credit gets tight, when it’s difficult to borrow, when the economy starts to lose liquidity, it shows up first in the banks.
Indeed, back in 2007 – just before the Great Financial Crisis – the KBW Bank Index peaked in July. It lost 25% over the next three months as the S&P 500 continued higher to its peak in October.
Of course, it’s a giant leap to say that this week’s poor action in the banking sector is signaling a credit crisis of the magnitude of the Great Financial Crisis. It’s too early to draw that conclusion.
But, on top of all of the other caution signs throughout the market, at the very least, this week’s action in the banks is a reason to be careful buying stocks right here.
The canary is coughing.
Best regards and good trading,
Jeff Clark
Editor, Market Minute