It’s time to bet against the banks.
Bank stocks have been on fire in 2024. The Financial Select Sector Fund (XLF) is up nearly 40% this year. It has been leading the stock market higher.
Now though, the sector is overbought. And, the bullish percent index for the financial sector (BPFINA) is about to generate its fifth sell signal in two months.
Look at this chart of BPFINA…
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 three BPFINA sell signals this year. You’ll notice the sell signals appear in clusters – with three near the start of the year, three in March, two in May, and four sell signals clustered over the past two months.
Here’s how the KBW Bank Index (BKX) performed following the previous clusters…
Following these “cluster sell signals” BKX declined 3% in two weeks in February, 7% in three weeks in April, 5% in three weeks in June, and 9% in two weeks in August.
We now have a cluster of four sell signals over the past two months. And, when the BPFINA turns lower again from its current overbought condition, we’ll get a fifth sell signal. That could happen as soon as today.
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Since the BKX declined to slightly below its 50-day moving average following the four previous times the index was in this condition, it’s likely we’ll see similar action on the next decline.
In other words, it looks like the banking sector is setting up for at least a 10% decline.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
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