It’s almost earnings season, which means it’s time once again to pay attention to bank stocks.
The action in the banking sector tends to lead the action in the broad stock market. When the banks are strong, the market rallies. When the banks are weak, so is the stock market.
The last time we looked at the KBW Bank Index (BKX), we noted that the sector was stuck in a relatively tight trading range for a couple of months.
Energy was building, and the sector was on the verge of a larger move – in one direction or the other. We slightly favored an upside move. And we suggested that if the bank stocks rallied, the rest of the stock market would follow.
Sure enough, the bank index rallied hard all through March – gaining 8.4%. That helped the S&P 500 to put up a 3.1% gain for the month.
Early Warning Signs
Now, though, it’s a new month, a new quarter, and a new earnings season. And it looks like the banking sector may be headed in a new direction.
Take a look at this updated chart of BKX…
The index finished March at its highest level in a year. Notice, though, that the momentum indicators at the bottom of the chart are still well below their December highs.
This sort of “negative divergence” tells us the momentum behind the current rally is weakening. It’s an early warning sign of a possible change in trend – from bullish to bearish.
The upcoming earnings season could be a catalyst for that change.
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Banks Lead the Market
Investor sentiment towards the bank stocks is bullish. Most of the financial television talking heads are talking up the banking sector. Everyone seems to be looking for good earnings results from the banks.
That suggests to me that much of the potential for good news is already discounted in the price of the stocks. So, any hint of bad news could inspire a decline in the banking sector.
And since the banks tend to lead the broad stock market, if BKX starts to fall, the rest of the stock market should follow.
Best regards and good trading,
Jeff Clark
Editor, Market Minute