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Over the next few weeks, the bank stocks are set up to lead the market.
The only question is, which way are they headed?
Most of the major money center banks are scheduled to report earnings over the next two weeks. The market’s reaction to those reports will set the tone for earnings season.
If the bank stocks rally, then so will the market. If the banks sell off, then the market will struggle.
We faced a similar situation three months ago, when all the banks were lined up to report earnings.
Back then, expectations were low. The bank stocks and the stock market had been declining. And my contrarian nature had me wondering if we’d see an upside surprise…
That’s what we got.
Despite issuing relatively poor earnings reports, the bank stocks rallied.
From mid-July until mid-August (the heart of last quarter’s earnings season) the KBW Bank Index (BKX) gained 16%. The S&P 500 mimicked that move.
Today, everything looks similar to July’s setup.
Earnings expectations for the banking sector are low. Bank stocks have been weak for the past several weeks. BKX is trading near its low for the year, back down to where it was at in July. And once again, I’m wondering if we’re setting up for an upside surprise.
Take a look at this chart of BKX…
This chart is a bit muddled. There really isn’t a clear trend.
Back in July, we had the potential for a bullish reversal. BKX had been declining. It had made a lower low. But the momentum indicators at the bottom of the chart (MACD and RSI) were rising.
This sort of “positive divergence” is often an early warning sign of an impending rally.
That’s partly why we were looking for a bullish reaction to the bank stocks’ earnings reports back then.
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We currently don’t have any positive divergence. And we’re not likely to get any prior to the upcoming earnings announcements.
Moreover, thanks to the rally earlier this week, we don’t have any extremely oversold conditions that might provide fuel for a rally in the banking sector.
Nor do we have any of the technical patterns (like wedges or coiled moving averages) that suggest a big move in one direction or the other.
In other words, we don’t have an edge.
And without an edge, it’s hard to justify any sort of directional trade.
It’s probably best to wait and see how the market reacts to the first bank earnings reports that gets issued next Friday.
Then we can see what the tone will be like this earnings season.
Best regards and good trading,
Jeff Clark
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