Earnings season starts today. How it goes is, once again, all up to 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 money center banks are scheduled to report earnings starting today. And however the market reacts to those reports will set the tone for this earnings season.
The bank stocks have enjoyed a monster rally over the past several weeks. The KBW Bank Index (BKX) is up 33% since late November.
Expectations are high. Most of the financial television talking heads are super-bullish for the banking sector – for good reason.
The Fed has stopped raising rates. The economy appears to be humming along just fine. The stock market rally is boosting trading activity.
And the risk of a Treasury bond collapse that was such a concern last year is merely an afterthought today.
But I’m a Contrarian…
Just about everyone is looking for good news from the banks this earnings season. And the price of the bank stocks reflects that situation.
But my contrarian nature has me wondering if the banks have rallied so much that we’re due for a downside surprise.
Look at this chart of BKX…
Over the past four weeks, the index has been grinding higher – making a series of higher highs.
But, while BKX has been rallying, the technical indicators at the bottom of the chart (MACD, RSI, CCI) have been making higher lows. This sort of “negative divergence” often signals an impending change in trend – from bullish to bearish.
The upcoming earnings season could be a catalyst for that shift.
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Let’s face it: most investors are looking for positive announcements from the banks. They’ve been buying the stocks in anticipation of bad news.
So, much of the potential for good news is already discounted in the price of the stocks. That means any hint of bad news could inspire a sell-off in the banking sector.
And if the banks start to fall, then the rest of the stock market should follow along.
Best regards and good trading,
Jeff Clark
Editor, Market Minute