Bank stocks are ready to rally.
That may seem like an odd remark. After all, the last time we wrote about the banking sector back in January, we were bearish.
Since then, though, the KBW Bank Index (BKX) has fallen 13%. The technical condition has gone from overbought to oversold. And, the index is now trading historically far below its 50-day moving average.
In other words, all of the reasons we had to be bearish on the bank stocks in January have flipped. They are now the reasons to be bullish.
Even more important, though, is the bullish percent index for the financial sector (BPFINA) has just generated a buy signal.
This is the type of setup I find for my Jeff Clark Trader readers each month — using a strategy that’s produced gains like 222% in 8 days and even 1,285% in just 48 hours. You can check out how it works here.
Look at this chart of BPFINA…
A bullish percent index (BPI) 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 – meaning 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.
The red arrows on the chart point to the three most recent BPFINA sell signals this. BKX declined 8% in three weeks following the sell signal in December 2024. It fell 4% in about one month following the sell signal last May. And, the most recent sell signal in January has produced a 13% decline.
The blue arrows show the most recent buy signals – of which there are only two. The buy signal last April occurred at the end of the “tariff tantrum” decline. From there, of course, the KBW Bank Inex put on a blistering rally – gaining 40% in just over three months.
We probably shouldn’t expect the same sort of performance from the newest buy signal, which triggered last Friday. Conditions are not nearly as oversold as they were last April. But, they are oversold enough to justify a strong bounce from current levels. And, with the outstanding track record of BPFINA buy and sell signals, traders should be willing to add some exposure to the bank stocks right now.
There’s an excellent chance they’ll be higher in the weeks ahead.
Best regards and good trading,
Jeff Clark
Editor, Market Minute