Bank stocks are setting up for a big move.
It has been a quiet year so far for the banking sector. The KBW Bank Index (BKX) started 2024 at $97 per share. It closed Friday just under $96. So, while the S&P 500 has rallied over 6% this year, the 1% loss in the bank stocks has been uninspiring.
That’s odd – because the bank stocks tend to lead the market.
So, we have to wonder… Is the lackluster action in the banking stocks predicting a decline in the broad stock market? Or, will the banks rally and play “catch up” with the S&P 500?
We should know the answer soon.
Take a look at this chart of BKX…
Heading into 2024, the banking sector was overbought. BKX was trading historically far above its 50-day moving average (the squiggly blue line on the chart). All of the moving averages were expanded far away from each other. And, all of the momentum indicators at the bottom of the chart were in overbought territory.
In this condition, there’s not much energy available to fuel a rally.
So, BKX has basically just chopped back and forth over the past two months. It has been stuck in a relatively tight trading range as the chart builds energy for the next big move.
And now, all of the moving averages have coiled together around the current price of the index. All of the momentum indicators are in neutral territory.
There’s a big move coming.
The question, of course, is… Which way?
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Typically, a consolidation period following a strong rally tends to lead to another move higher. So, the odds favor the bulls in this case. But, it’s not a sure thing. It’s more like a 60/40 proposition.
Traders looking to play the bank stocks off of this pattern are better off waiting for BKX to break out of its consiolidation range before placing a bet in the direction of the break.
In other words, if BKX breaks above $97.50, then it’s likely headed higher.
If BKX breaks below $92.40, then it’s likely headed lower.
And, of course, whichever way the banks move the broad stock market is likely to follow.
Best regards and good trading,
Jeff Clark
Editor, Market MInute