No Decent Rally Without the Banks

The bank index broke, and the ratio of the bank index relative to the S&P 500 earlier last week was a precursor to the bank index breaking. And as usual, the banks breaking is a precursor to the market falling.

Yet I continue to hear folks on TV say that the banks don't matter. Maybe they're same folks who said the price of oil doesn't matter either!

In the meantime, the euro/yen currency relationship must have broken about five minutes after I had penned that column on Friday morning. And it didn't just break so that you'd need a microscope to see it. It broke in dramatic fashion.

I suspect it now holds in that 119 area the first time down. But even if you're not a chart person you can see that any rally back to the 125 area is a sale now.

So we have the banks breaking, the euro/yen breaking, and, let's not forget, we have an overbought market.

Keeping in mind that this is the 10-day moving average of the advance-decline line we should take a look at the numbers we are dropping in the next week or two. For the next six out of seven trading days we are dropping positive numbers. Therefore, the earliest I can see us getting a decent oversold reading would be just after Barack Obama's inauguration on Jan. 20. And that's if we are down this week.

This doesn't mean we can't rally this week. Heck, we're down almost 6% in a straight line so another down day should set us up for a day or two on the upside. But there is a difference between being oversold and having a rally to relieve some downside pressure.

If we take a look at the chart of the bank index we can see the break at 41 (blue line) but we can also see we are now just about at the early December lows of 39.50 (red line). A bounce from this level would be typical. But I think a rally back up to the 40-41 area would now run into resistance.

I'm a firm believer that the banks don't need to be market leaders, but they cannot be serious underperformers. If the banks just hold their own relative to the S&P the market can be OK. But if the banks can't participate in a market rally then there can't be a decent market rally. That is why I watch that ratio of the bank index relative to the S&P like a hawk. It needs to show it can hold or I believe the market can only have short-term oversold rallies, or nothing sustainable.

So until we get oversold again, until the banks stop falling more than the S&P, and until we see a bit more bearishness out there, I don't think rallies can last very long.

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Know What You Own: Meisler mentioned the bank index. Some stocks in that index are Bank of America (BAC - commentary - Cramer's Take), Wells Fargo (WFC - commentary - Cramer's Take), Citigroup (C - commentary - Cramer's Take), Northern Trust (NTRS - commentary - Cramer's Take), Bank of New York Mellon (BK - commentary - Cramer's Take), KeyCorp (KEY - commentary - Cramer's Take) and State Street (STT - commentary - Cramer's Take).

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At the time of publication, Meisler had no positions in any stocks mentioned, although holdings can change at any time.

Helene Meisler writes a daily technical analysis column and TheStreet.com Top Stocks. For more information, click here. Meisler trained at several Wall Street firms, including Goldman Sachs and SG Cowen, and has worked with the equity trading department at Cargill. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback; click here to send her an email.