The bank stock rally is just about over.
The KBW Bank Index (BKX) has had a great run since we pointed out the bullish technical setup two weeks ago.
BKX is up 7% since then. And strength in the banking sector has helped to prop up the rest of the broad stock market.
Now, though, BKX has achieved the target price of the technical pattern. It’s overbought.
And the Bullish Percent Index for the Financial Sector (BPFINA) is on the verge of generating a sell signal.
Take a look at this chart of BPFINA…
Longtime readers know that 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.
The BPFINA closed Friday above 93. That’s the highest level in more than a year. And it can’t climb much higher since 100 is the maximum reading.
When it turns down from this level, the BPFINA will generate a sell signal for financial stocks.
The last time that happened, in early October, bank stocks ignored the sell signal and climber higher. They had the benefits of a bullish technical setup and bullish reactions to their earnings reports.
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Now that the bullish technical setup has achieved its target, and the earnings reports are mostly out of the way, the financial sector is more vulnerable to a BPFINA sell signal.
When we had a similar setup following earnings reports in July, BKX dropped 10% in just one week.
Readers who bought bank stocks two weeks ago based on the bullish technical setup should take profits now. The next big move for the sector looks like it will be lower.
Best regards and good trading,
Jeff Clark
Editor, Market Minute