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The Curious Lethargy of Bank Stocks

This column was originally published on RealMoney on Jan. 9 at 12:00 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

It's all about interest rates these days. A growing consensus that the Federal Reserve is almost done raising rates lit a fire under stocks last week, triggering a sharp rally to multiyear highs. Curiously, though, financial stocks didn't participate in this euphoric move. Curious indeed.

Over the holidays, I pointed out the Philadelphia banking index, or BKX, was sitting at multiyear resistance and looked ready to break out. It's odd that the index and its underlying components didn't break out during last week's powerful rally. After all, this particular sector should lead the charge in a favorable rate environment.

So there's reason for caution after last week's hot market. I don't want to overstate the case because the odds still favor a sector breakout. But this strange divergence should be watched closely. Bank stocks have another week or two to make their move. After that, gravity could take control and push them considerably lower.

I've been tracking dozens of these stocks, looking for breakout opportunities in the weeks ahead. Unfortunately, the group still shows a mixed bag of leaders and laggards. Most of the big names aren't being accumulated with any conviction.

Take Bank of America (BAC). The stock rallied from $41 to $47 when bullish chatter on interest rates began last autumn, but it topped out in November. It has been unable to move higher the last six weeks, despite the rally in the major indices. In the meantime, accumulation has rolled over in a series of lower highs.

Like many banking stocks, Bank of America is sitting at strong resistance, trying to figure out what to do next. Perhaps investors are waiting for real news on interest rates, rather than frantic speculation driven by self-serving analysis. In any case, its chart presents a more cautious view on the outlook for interest rates.

But one banking group isn't waiting for bullish rate news to move higher. Foreign banks listed on the New York Stock Exchange are rising strongly -- many are trading at multiyear peaks. It's depressing to admit the bright outlook moving these stocks, while American banks are stuck in the mud.




Here are the 10 strongest foreign bank stocks on the NYSE, listed by performance relative to their 200-day moving averages. Many of these issues look like they have more upside this year.

Foreign Banks Trading Higher
STOCK PRICE 52-WEEK CHANGE
Unibanco Uniao De Bancos (UBB) $71.96 140%
Bancolumbia Sa (CIB) $30.62 130%
Banco Bradesco Sa (BBD) $31.96 179%
Kookmin Bank (KB) $77.93 106%
Shinhan Financial Group (SHG) $86.40 96%
ICICI Bank (IBN) $31.67 70%
Mitsubishi UFJ Financial Grp (MTU) $13.99 40%
Banco Itau SA (ITU) $27.00 86%
Banco Santander Chile (SAN) $45.63 36%
Royal Bank of Canada (RY) $78.55 54%
Source: Worden's TC2005

American bank stocks show varied year-over-year performance across different segments. Regional savings and loans look much stronger than big money center banks, with their worldwide exposure. Obviously, these hometown operations rely on residential mortgages for their profitability.

The uptick in this segment supports the conjecture about a better rate environment in the months ahead. But even these bank stocks have few components on the verge of breaking out to all-time or multiyear highs.

One exception is Investors Bancorp (ISBC), a New Jersey savings and loan I bought several weeks ago. The company came public in October at $10.70. It bottomed out the next day and started to move higher. Notice how it based at its IPO price for two weeks and then rose with more conviction. This suggests a rally into the midteens in the weeks ahead.

Of course, interest rates affect a broader range of stocks than just the banking group. In particular, real estate and mortgage issues twist and turn with each Fed pronouncement. Like the banking group, the price action in these stocks raises red flags.

Top mortgage lender Countrywide Financial (CFC) topped out in September 2004 and has been moving sideways since then in a broad rectangle pattern. Notice its inability to rally to the high of its 16-month trading range, despite the happy talk on interest rates. In fact, the push off the October lows stalled out at the same time as the banking index.

Really, I'm not trying to rain on the bulls' parade here. But why didn't the financial stocks rally when the S&P 500 levitated over 3% last week? Especially when the stated cause for the rally was forthcoming interest rate relief?

At the time of publication, Farley was long Investors Bancorp, although holdings can change at any time.

Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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