The S&P 500 lifted to an all-time high this week while commercial and regional bank funds slumped in the red, continuing weak price action in place in early March. The conflict signals a bearish divergence that raises doubts about the latest leg of the 6-month rally while telling market players to watch these stocks closely in coming weeks because their behavior could presage a steep summer correction.
The banking sector lagged badly after the 2008 economic collapse, stuck under the weight of bad decisions, heavy debt and Dodd-Frank regulation designed to address too-big-too-fail systematic risks. But Donald Trump’s election was supposed to change all that, with regulatory rollbacks, stronger commercial lending and higher interest rates signaling a golden age for sector profits.
However, Fed data reports that business and consumer loans slowed in the first quarter of 2017, continuing a downtrend that started in early 2016. These sober reports contrast with wildly optimistic projections that followed the election of a business and bank friendly president. Apparently, U.S. businesses are in no hurry to borrow and expand when they can sit back and build profits through corporate tax relief.
JP Morgan Chase and Co. (JPM) has carved the banking industry’s strongest price pattern so any weakness in this market leader should reflect more challenging economic conditions. The stock topped out in the upper-60s in 2000 and sold off when the tech bubble burst, reaching a multi-year low in the mid-teens in 2002. It tested that level during the market crash, undercutting support by 30-cents ahead of a recovery wave that stalled in the low-50s in 2010.
The stock broke out above that level in 2013 and reached resistance at the 2000 high in 2015. A volatile 16-month consolidation pattern yielded a post-election breakout, lifting the stock to an all-time high at $93.98 following President Trump’s well-received Congressional address on March 1st. A pullback into January support in the low-80s got bought but fizzled out after the company reported mixed first-quarter earnings in April. It fell to support once again this month, completing a head and shoulders pattern that could signal a much steeper slide into the low-70s.
Unlike rival Chase, Bank of America, Corp. (BAC) has failed to fully recover from last decade’s financial catastrophe, even with the historic post-election rally. It topped out in the mid-50s in 2006 and sold off to a multi-decade low at $2.53 in the first quarter of 2009. A bounce into October posted the strongest price action so far in this bull market cycle, recouping more than 15-points into the upper teens. That level generated heavy resistance for the next seven years, triggering five failed breakout attempts into the second half of 2016.
The November breakout ejected into a healthy momentum rally that lifted the stock to an 8-year high at $23.39 in December. It rallied above that level in mid-February, but the uptick stalled a few weeks later, giving way to significant profit-taking that dropped price into January support near $22. A bounce into the second quarter failed to attract significant buying interest, reversing above $24 in mid-May, ahead of a decline that’s testing horizontal support once again. It’s also carved a head and shoulders pattern, with a breakdown targeting November breakout support near $20.
The Bottom Line
Blue-chip banking giants have carved bearish-looking consolidation patterns well above November breakout levels. This scenario tells us that breakdowns will generate two-sided trade setups, with the decline targeting newly-minted shareholders who bought too high in the rally pattern while generating long-term buying signals when the selloff reaches November support. Secondary breakdowns through those deeper levels would have a much stronger impact on the broad tape, likely signaling the end of the secular bull market.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>