Why Bank Stocks’ Performance Is a Bad Omen for the Market

Bank stocks hit a sour note to kick off earnings season. That’s a bad omen for the broad stock market.

Several big-name bank stocks reported earnings yesterday. And, they crushed it.

JPMorgan (JPM) beat expectations. BlackRock (BLK) beat expectations. So too did Wells Fargo (WFC) and Bank of New York Mellon (BK).

But, all of the stocks traded lower. It was the epitome of a “sell on the news” event.

The banking sector rallied over the past few weeks in anticipation of better-than-expected earnings results. Traders piled into the names ahead of time – discounting the strong results. There was nobody left to buy once the news was out. So, the stocks sold off on the news.

That’s the problem when stocks are priced for perfection. And, that could spell trouble this earnings season.

You see, 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.

Regular readers will recall I mentioned this phenomenon last earnings season as well. Back then, bank stocks had been falling ahead of their earnings reports. Expectations were low. And, investors were discounting the worst of all possible news.

Once the big banks started reporting earnings, and the results were better than expected, traders plowed into the names. The bank stocks rallied, and the buying pressure spilled over into the rest of the stock market.

Now though, we have the opposite setup…

Bank stocks have rallied into their earnings reports. Expectations are high. Investors are discounting the best of all possible results.

And so far… investors are selling on the news.

If that selling pressure spills over into the rest of the stock market, this could prove to be a difficult earnings season.

Best regards and good trading,

Jeff Clark
Editor, Market Minute