What Big Banks Are Hinting About the Market

Earnings season starts this week. So, once again, it’s time to follow 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.

That was certainly the case last quarter. In early January, the setup in the KBW Bank Index (BKX) was indecisive – neither bullish nor bearish. It could break either way. And, whatever the direction, the broad stock market would follow.

Sure enough, BKX blasted higher as the big, money center banks issued outstanding earnings reports. The S&P 500 followed right along, gaining 300 points between mid-January and mid-February.

Now, with the broad stock market in “correction mode,” the big bank influence is even more important.

The major money center banks are scheduled to report earnings starting on Friday. The market’s reaction to those reports will set the tone for this earnings season.

The banking sector has come under pressure in recent weeks. BKX trades about 25% lower than when it peaked in mid-February. 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 action over the past two months has created a series of lower highs and lower lows. Last week’s decline pushed BKX back towards its low from way-back last August. And, it looks like an ominous sign as we enter earnings season.

But, look at the momentum indicators at the bottom of the chart. The MACD and RSI are holding above their March lows.

This sort of “positive divergence” is often an early warning sign of an impending rally.

It’s not a guarantee of a rally, of course. If BKX continues to fall then the momentum indicators could drop to lower lows – thereby negating the positive divergence that currently exists.

But, if the momentum indicators can hold up for the next few days it could be a good sign for the banking stocks as they start reporting earnings.

And, what’s good for the banks is often good for the broad stock market.

Best regards and good trading,

Jeff Clark
Editor, Market Minute