If the stock market is going to rally in April, then the banks are going to have to lead the way higher.
Two weeks ago, almost all the talking heads on the financial TV stations were crowing about an April stock market rally saying, “April is traditionally the most bullish month of the year.”
But so far, the action has been disappointing.
As of Tuesday’s close, the S&P 500 is down about 132 points this month – nearly a 3% drop.
Of course, the bulls will point out that we still have 16 days left in the month. That’s plenty of time for the market to recover and keep the April winning streak intact.
But like I said, it’s up to the banks…
You see, the bank sector tends to lead the stock market.
When bank stocks are rallying, the stock market tends to rally. And, when the bank stocks fall, so does the broad stock market.
We only need to look at the 4% decline in the KBW Bank Index (BKX) over the past two weeks to explain the weakness in the S&P 500.
But for the next couple of weeks, most of the major banks are scheduled to report earnings.
Expectations are low… Any positive news could spark a rally in the sector, which should lead to a rally in the broad stock market. And it looks like the banks are setting up for a rally.
Take a look at this chart of BKX…
First off, the index is trading 12 points below its 50-day moving average (MA).
That’s a relatively extended condition. BKX usually doesn’t stretch more than 10 points from its 50-day MA before snapping back toward the line.
More importantly, while BKX has dropped to a lower low for the year, the technical indicators at the bottom of the chart (MACD, RSI, and CCI) are making higher lows.
This is the sort of “positive divergence” that often signals an impending change in trend – from bearish to bullish.
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The upcoming earnings reports could be a catalyst for that shift.
Let’s face it, most investors aren’t looking for positive announcements from the banks.
The yield curve has flattened… loan demand is down… and with the poor stock market action this year, trading revenues are likely to be lower as well.
The weakness in the bank stocks is already discounting all that bad news. So, any hint of good news could inspire an oversold rally in the banking sector.
And if the banks start to rally, then the rest of the stock market should follow along.
Best regards and good trading,
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Jeff Clark
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