The bank stocks have been leading the stock market higher over the past several weeks…
While the S&P 500 has rallied about 10% since it bottomed in early October, the KBW Nasdaq Bank Index (BKX) has rallied 15%.
But now the banking sector is looking toppy…
So far, BKX is down more than 3% this week. And if that continues, it could spell trouble for the broad stock market.
Look at this chart of the S&P Financial Sector Bullish Percent Index (BPFINA)…
A bullish percent index shows the percentage of stocks in a sector that are trading in bullish technical patterns.
It’s an easy way to measure overbought and oversold conditions for a sector.
Typically, a reading above 80 (80% of the stocks are trading in bullish technical patterns) – means a sector is overbought. Readings below 30 indicate oversold conditions.
Buy and sell signals occur when a BPI reaches extreme levels and then reverses…
For example, when a BPI rallies above 80 and then turns lower it generates a sell signal.
When a BPI dips below 30 and then turns higher, that’s usually time to buy. At least, those are the general rules.
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On the chart, the red arrows point to the three BPFINA sell signals this year. Take another look…
Each previous signal triggered at least a 17% drop in the KBW Nasdaq Bank Index. Each decline lasted about six weeks.
And since the banking sector tends to lead the broad stock market, the declines in BKX coincided with declines in the S&P 500.
On Wednesday, the BPFINA closed at 89.55… That’s the most extended and overbought reading of the year.
When it turns lower, it’ll trigger the fourth financial sector sell signal of the year.
Traders should pay close attention to this chart and to the action in the bank stocks over the next few days.
We don’t have a BPFINA sell signal yet. But just a little more weakness in the bank stocks will do the trick.
Once it happens, it’ll be hard to argue for a year-end rally. We’ll most likely get a year-end decline.
Best regards and good trading,
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Jeff Clark
Reader Mailbag
In today’s mailbag, a Market Minute reader shares his thoughts on Wednesday’s essay by Clint Brewer…
Housing cost (rents and variable rate mortgage costs) continue to rise as do food and energy costs. These are primary components of monthly family expenses.
Rising mortgage rates are having adverse effect on home sales and new construction resulting in lost durable goods and building product orders.
It may be a while before we see the bottom despite the recent CPI declines. I fear that rising unemployment will lead to declining GDP and equities.
I hope I’m wrong, but I’ll remain on the sidelines for a bit longer.
– Anthony M.
And other readers have positive feedback on Jeff Clark’s insights and trade recommendations…
Jeff and his team have an excellent sense of anticipation of market movements, which is why their recommendations are successful.
– Anonymous
Jeff, I’ve always loved your insight.
– Fredrik H.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].