Are Bank Stocks Sending A Market Warning?

It has been a rough week for the financial stocks, especially the banks. As of mid-day on Friday Bank of America BAC (BAC) is down 10.5% for the week. Comments Tuesday from BofA CEO that “the company is slowing hiring in an attempt to manage headcount ahead of a downturn” along with the expressed recessionary fears of other bank officials put additional pressure on the stocks.

The question for both investors and traders is what does almost a 5% decline in an ETF like SPDR S&P Bank ETF (KBE KBE ) mean for this group as we head into the new year? The banks are just one component of the financial sector so I would first look at the weekly chart of the Financial Sector Select (XLF XLF ) which also includes other financial services companies.

XLK peaked at $41.70 in January and dropped to a low of $29.59 in October. XLF had dropped below the weekly starc- band three weeks before the low indicating it was in a high-risk sell or low-risk buy area. The moves outside of the starc bands are noted by yellow boxes (and white arrows)

Below the bar chart, the JA Vol Confirm includes the OBV and other volume indicators which gave a short-term positive signal in October even though the major trend was negative. The JA Aspray Insight measures the relative performance of XLF versus the S&P 500. It turned positive in September (see arrow) indicating that XLF was starting to lead the S&P 500.

Four weeks after the low XLF overcame the resistance at line a, and closed above the starc+ band. Three later on December 1^st it made a marginal new high at $36.49 before closing lower for the day. The close that week was about equal to the week’s open so a doji was formed. A close this week below the doji low at $35.14 will trigger a weekly doji sell signal.

This is supported by the weak volume analysis as it has formed lower highs, line d. In a strong market, you would want to see higher highs. The weekly RS analysis is still bullish but is dropping sharply which increases the odds it could flip back to negative next week.

The daily chart of XLF shows the spike low in October that was accompanied by positive volume and RS analysis (point c). The volume stayed positive until the start of the week but did not make a new high with prices on December 1^st.

The daily chart shows that the daily starc- bands have been exceeded several times this week. This increases the odds of a bounce next week which could take XLF back toward the 20 day EMA and the resistance in the $35-$36 area. The negative volume analysis does suggest the rally will fail and the RS has been warning since the middle of November. There is next good support in the $33 area, line b, which is about 5% below current levels.

The daily chart of the SPDR S&P Bank ETF (KBE) looks considerably weaker than that of XLF. It peaked at $50.40 on November 11^th which was one day after the move above the starc+ band (see arrow). That was just above the pivot resistance at $50.36

The sharp decline Tuesday likely triggered some stops in the individual bank stocks as well as the ETF. KRE KRE also closed below its starc- band again on Thursday. The declining 20 day EMA at $47.85 should be strong resistance.

The weekly and daily technical action in the financial sector and the banks suggests that the recent pessimism of the bank CEOs may be well founded. Also it is a valid concern that despite few signs of problems in the credit markets that the bands are sending a warning for the overall market. It would take a strong rally as the FOMC meets next week to change this view and I will be updating this analysis on Twitter.