It took a cluster of five sell signals, but the warnings from the financial sector bullish percent index (BPFINA) finally paid off.
The KBW Bank Index (BKX) is trading 10% lower today than where it was earlier this month when we said it was time to “bet against the banks.”
Back then, we argued that clusters of sell signals in the BPFINA often preceded pullbacks in BKX.
Indeed, the four previous times we faced this condition this year the Bank Index sold off until it was trading just slightly below its 50-day moving average. So, we suggested it was vulnerable to at least a 10% decline.
Here’s the updated chart of BKX…
BKX closed Wednesday slightly below its 50-day MA, and down just over 10% from its late-November high. This move is consistent with previous BPFINA cluster sell signals.
In the process, the bullish percent index for the financial sector has declined from an extremely overbought condition. It is now in neutral territory.
Take Your Win
Here’s an updated look at BPFINA…
At 56.94, the BPFINA is near its lowest level of the year. It’s not yet oversold. It will take a decline below 30 to create that condition. But, it’s nowhere near as overbought as it was two weeks ago.
The “easy money” trade of betting against the banks earlier this month is over. Profiting from a further decline is going to be more difficult.
So, if you bet against the banks based on my advice two weeks ago, then it’s time to book your profits.
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I’m not suggesting you reverse the trade and go long the banks right now. We’ll need to see oversold conditions before I’d make that recommendation.
But, with the BPFINA trading near its lowest level of the year, and with BKX hitting our price target, it makes sense to cash out the trade.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
P.S. I identified this winning trade using my “Magic Pattern” system of trading. I use this consistently to help my subscribers make triple-digit gains.
Check it out right here.