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Get ready to buy the banks.
The banking sector has been miserable for the past several weeks. After peaking near $194 in mid-August, the KBW Bank Index (BKX) closed Monday at $173. That’s an 11% drop in a month-and-a-half.
Now though, the same indicator that told us to sell the bank stocks two months ago – as BKX was near an all-time high – is suggesting it’s almost time to get back in.
Here’s an updated look at the Bullish Percent Index for the financial sector (BPFINA)…
As a reminder, a bullish percent index (BPI) shows the percentage of stocks in a sector that are trading in bullish technical patterns.
It’s an easy way to measure overbought and oversold conditions for a sector. Typically, a reading above 80 – meaning 80% of the stocks are trading in bullish technical patterns – means a sector is overbought. Readings below 30 indicate oversold conditions.
Buy and sell signals occur when a BPI reaches extreme levels and then reverses.
For example, when a BPI rallies above 80 and then turns lower, it generates a sell signal. When a BPI dips below 30 and then turns higher, that’s usually time to buy. At least, those are the general rules.
The red arrows on the chart point to the most recent BPFINA sell signals. All of those signals warned of impending declines in the bank stocks. And, all of those signals proved correct with the KBW Bank Index (BKX) declining 15% in two months following the sell signal in January. BKX fell 4% in one month after the April sell signal.
And, the most recent signal in July preceded an 11% drop in the index.
The blue arrow on the chart points to the one BPFINA buy signal we’ve seen this year, back in March. BKX rallied 16% in the next five weeks.
The setup today looks similar to the conditions we saw in March.
The BPFINA is nearing oversold levels. When it turns higher, we’ll have another buy signal from this indicator.
It’s not time to buy quite yet. But, we’re getting close. Traders should prepare to start buying the bank stocks. Based on the previous success of BPFINA trading signals, the bank stocks are setting up for a rally.
Best regards and good trading,
Jeff Clark
Editor, Market Minute