Banks have been perking up in recent days, but the sector isn't likely to move substantially higher anytime in the near future. The problem is twofold. First, these issues are working through massive supply that was set into place by the 2008 crash. Second, political uncertainty isn't likely to vanish, despite an easing of populist rhetoric.
The group has enjoyed a decent rally in the last two weeks, lifting the KBW Banking Index (BKX) to a four-week high. The uptick is an obvious response to published reports that Congress will water down the so-called Volcker Rule enough to allow proprietary trading, although the practice may face new restrictions. Add in Republican roadblocks to all forms of banking regulation, and outright prohibition becomes far less likely.
Hopefully our senators will exercise caution, because more ambitious (and less politicized) nations stand ready to welcome full-service banking, threatening the expatriation of Wall Street giants and their billions of dollars if the rule is passed. As an example, the Canadian government said last week that it will oppose heavy-handed bank regulation or taxes, clearly implying that the country would be happy to welcome Wall Street's evildoers.
Current events in the U.K., in particular, should raise congressional eyebrows, because banks domiciled in that nation are threatening a mass exodus in response to punitive regulations by the heavy-handed Gordon Brown government. That confrontation could be a dress rehearsal for our fate on this side of the Atlantic if bank scapegoating continues abated.
Although banks might dodge a major political bullet this time around, they're less likely to sidestep the extensive technical damage that was done during the credit crisis. Yes, the worst days are behind them, with historic lows that are unlikely to be breached in our lifetimes. But I believe the healing process will take far more time than Wall Street optimists want investors to believe.
The KBW Banking Index cascaded from 121 to 17.75 in less than two years and then bottomed out in March 2009. The subsequent recovery, so far at least, has failed to reach the 38% selloff retracement. Contrast this price action with the action in the identical period from the
, which spiked above its 50% retracement before topping out last month.
Note how the index stalled near 50 last August and has made no upward progress in the last six months. The sideways pattern in place since that time shows support in the low 40s, roughly corresponding to the 200-day moving average. Price has been ticking higher for the last three weeks and is now approaching pattern resistance.
Yes, I can see the general outline of a six-month inverse head-and-shoulders pattern. But do you see the massive resistance generated by the July into November 2008 rally and collapse? Nothing less than rapidly improving fundamentals will lift the index through that gauntlet of unhappy shareholders.
Now look at on-balance volume (OBV) on the daily index chart. Even though price has been moving higher for the last three weeks, accumulation has flatlined, pointing to a lack of institutional participation. In fact, an index breakout will trigger a bearish divergence until the OBV blue line passes above the red line, and that isn't likely to happen in the next two or three months.
Given the technical challenge, it's hard to visualize anything more bullish than a seesaw pattern, like the choppy price action between August and October. That type of consolidation might allow accumulation to "catch up" with price by the end of the second quarter. More likely, intense selling pressure will hit any breakout attempt in the next few weeks and yield a downturn that tests the fourth-quarter lows.
Individual bank stocks have flatlined along with the broad index since the second half of 2009, but a handful of these issues have carved out more constructive volume patterns.
Bank of America
, for example, has gone nowhere since last May, but shareholders have hung tough and are showing no inclination at all to dump their positions.
This resilience will support the upside in the future, but this stock has already risen sevenfold off its bear market low. While that's an amazing rally, it's time to remember that "the bigger the move, the broader the base." That sage advice is warning shareholders that the next uptrend could be months or years away, because the stock needs time to rest.
It impossible to end this discussion without taking another look at
, the political poster child for everything that went wrong in 2008, even though the company did everything right. After reporting third-quarter earnings in October, the stock has been pulling back in an orderly correction since it topped out.
To be frank, this pattern looks positively serene compared with the political intrigue that surrounds this Wall Street icon. The chart shows just one big distribution event. That occurred when the stock broke the 200-day moving average on Jan. 21 and 22. It also reveals a monthlong basing pattern just under new resistance.
This is intriguing, because a high-volume base breakout into the 160s would trigger a major buy signal that the three-month correction is over. I'm not sure that's exactly what our Washington wunderkind have in mind for this political punching bag, but it does offer a ray of hope for the entire financial sector.
Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.
At the time of publication, Farley had no positions in stocks mentioned, although holdings can change at any time.
Alan Farley is a private trader and publisher of
Hard Right Edge
, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of
, a premium product from TheStreet.com that outlines his charts and analysis. Farley has also been featured in
. He has written two books:
, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
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