It may be up to the banks to save the stock market this month.
We’ve published several bearish articles recently in Market Minute. We’ve cited everything from the seasonal trends that unfold this time of year to the prices of Volatility Index options to the CBOE Put/Call ratio.
It seems that just about everything is screaming at us to be careful in this environment.
But if we look just at the charts and the technical picture, there’s one sector that stands out as bullish… the banks.
The action in bank stocks tends to lead the action in the broad stock market – especially during earnings season. When the banks are strong, the market rallies. When the banks are weak, so is the stock market.
The major banks will report earnings starting Friday. And however the market reacts to those reports will set the tone for this earnings season.
Bank stocks have been strong over the past year. The KBW Bank Index (BKX) is up about 50% since last October.
But as we head into earnings season, it seems as though expectations are low. Most of the financial television talking heads are relatively cautious on the banks.
They’re worried the Federal Reserve’s new rate-cutting cycle will lower net interest income. They fear a recession will weaken loan demand. And if the banks have to increase their loan-loss reserves, then they’ll lower earnings expectations for the coming quarters.
Those are all valid reasons to worry about the banks this earnings season. But the technical picture looks bullish. Check out this chart of BKX…
This chart has formed an ascending triangle pattern. It’s a bullish setup where each decline creates a higher low, and each rally bangs into the same resistance level. Most of the time, the resistance eventually gives way, and the chart explodes higher.
There’s a lot of energy built up in this chart. All of the moving averages are coiled together. And the momentum indicators at the bottom of the chart have pulled back from overbought conditions and cycled back into “neutral” territory.
So, there’s plenty of fuel to power a big move.
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BKX is now approaching the apex of the ascending triangle pattern. So, the banking sector is set up for a breakout just as the banks start issuing their earnings reports.
There’s no guarantee, of course. No pattern plays out 100% of the time.
But if we’re looking for potential bullish signs in the midst of a market that’s otherwise screaming at us to be careful, the bank stocks might provide that – starting Friday.
Best regards and good trading,
Jeff Clark
Editor, Market Minute