The Tide Is Retreating for the Banks

Banks sold off to multi-decade lows in March after Timothy Geithner's initial tenure as Treasury secretary triggered a violent reaction throughout the equity markets. The sector began to move higher at that time, in response to growing optimism that mark-to-market accounting rules would ease and give banks breathing room to fix their balance sheets.

The recovery continued into late April, while market players waited for results of the much-heralded bank stress test results. That news was released earlier this month, and bulls jumped on it as another reason to buy the banking sector. But a funny thing happened after this news event -- the banks stopped making new highs and started to pull back.

This wasn't surprising, considering the widely held belief that bank stress test results would trigger a broad sell-the-news reaction. What is surprising, though, is how market bulls have chosen to ignore the downturn and continue the sector cheerleading. Nowhere has this table-pounding been more intense than with Bank of America (BAC Quote).

Bank of America (BAC) -- Daily eSignal

Morgan Stanley and FBR Capital upgraded the stock recently, and the financial media pointed to a mild uptick following the secondary offering as proof positive the entire sector was still in bull mode. However, the most recent wave of "green shoots" euphoria doesn't jibe with bearish action seen since the beaten-down blue-chip topped out on May 7.

The stock has fallen back under the April 14 high, which means there hasn't been a single percentage point of progress in the last six weeks. This is typical near the end of momentum rallies -- bullish chatter continues long after a market turns, triggering bearish divergences that eventually resolve through a sharp downdraft.

Note how the two-month rally stalled under resistance at the 200-day moving average, currently near $15.30. This failure tells us the stock is still mired in the bear market that began in 2007. It pulled back to support at a rising channel last week and broke that level in Tuesday's session. The next stop lies at the 50-day moving average, just under 10 bucks.