Earnings season starts this week. 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 this week. However the market reacts to those reports will set the tone for this earnings season.
The bank stocks enjoyed a monster rally in 2024. The KBW Bank Index (BKX) finished the year up 34%. That’s better than the gains on the S&P 500. It’s even better than the 27% return of the fast-growing Nasdaq 100 Index.
But, the banking sector has come under pressure in recent weeks. BKX trades about 9% lower than when it peaked in mid-November. And, that action has some financial television talking heads wondering if the banks might come under even more selling pressure as they report earnings.
Let’s look at the chart…
The recent action has formed a consolidating triangle on BKX’s chart. The index has made a series of lower highs and higher lows – the dashed red lines. And, BKX is approaching the apex of the triangle just as we enter earnings season.
The index is set to break out of this pattern one way or the other sometime this week.
There’s no way to know for sure which direction the index will break. But, since the height of the wedge measures about 15 points, BKX is likely headed either towards the resistance of its all-time-high near $138, or the support of its October low near $112.
The momentum indicators at the bottom of the chart are of little help. They’re all in neutral territory. So, they’re not giving an edge to either the bulls or the bears.
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The Bullish Percent Index for the Financial Sector (BPFINA) has pulled way back from the extremely overbought condition we noted in November. But, at 45, the index is in neutral territory and well above the 30 level from which strong bank stocks rallies often emerge.
This is one of those times where there isn’t a strong risk/reward setup for betting on the bank stocks as we enter earnings season. Traders are better off waiting to see which direction BKX heads when it breaks out of the wedge, and then betting on a continued move in the direction of the break.
Let’s also keep in mind, if the bank stocks break down then the rest of the market is likely headed lower. On the other hand, if BKX breaks out to the upside, then look for the broad stock market to rally.
Best regards and good trading,
Jeff Clark
Editor, Market Minute