Earnings season kicks off tomorrow morning when a handful of big bank stocks report their numbers.
Expectations are high…
Just about everyone is looking for solid results out of JPMorgan, Chase & Co, Citigroup, Wells Fargo, and the rest of the financial cartels. And, the stocks have all rallied in anticipation of bullish announcements.
The KBW Bank Index (BKX) is up 16% in just the past three weeks. It rallied in the face of last week’s broad stock market decline. And yesterday, the index notched a new all-time high.
The problem with this sort of action, though, is that it sets up a “sell on the news” event…
If investors have already bought the bank stocks in anticipation of strong earnings reports, then there’s nobody left to buy once those reports are issued. And, a little bit of selling pressure can cause a sharp decline in the stock prices.
So, buying the banks right now seems a little risky to me.
Just look at this chart of BKX…
BKX traded yesterday about 11 points above its blue 50-day moving average (MA) line.
That’s a relatively extended condition. BKX usually doesn’t stretch more than ten points from its 50-day MA before it reverses and moves back towards the line. So, it’s a bit overbought here.
It’s more interesting, though, to look at the action on the chart going into earnings season last January.
Bank stocks enjoyed a strong rally back then as well. BKX stretched as much as 15 points above its 50-day MA line just before the big banks started to report earnings.
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The reports were impressive back then. Most banks beat expectations, and most banks raised their estimates for the rest of the year.
But look at what happened to the share prices… BKX tumbled 11% in the last two weeks of January.
It was a classic “sell on the news” event.
Just about everyone loves the bank stocks right now and is anticipating a stellar earnings season for the financial sector. And, given the price action of the past three weeks, just about everyone has been chasing the bank stocks higher.
That’s a dangerous combination. To me, the sector looks vulnerable to a short-term pullback.
Best regards and good trading,
Jeff Clark
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