When the banking sector performs well, it’s a healthy characteristic for the overall equity market. When the banking sector performs poorly, it’s no surprise to see overall stocks perform the same. Case in point, when banking stocks rolled over in Summer, 2015, so did the overall market. Don’t take our word for it. Check out the weekly chart of the KBW Bank Index below. The KBW Bank Index (BKX) is a modified market capitalization weighted index designed to track the performance of leading banks that are publicly traded in the U.S. We can’t trade it directly, but it’s a great index to monitor and identify what’s going on within the economically important banking sector.
In the weekly chart below, we can see that banks topped at the same time (mid-July, 2015) as the overall U.S. equity market. Is this a surprise? We think not. And since the top in 2015, the banking industry has struggled, taking the U.S. stock market with it. If this is not a surprise, then the fact that banks have rallied since early February along with U.S. stocks should also not be a surprise. Which brings us to today. We think the current price level will determine the next move for the overall equity market.
We can see that the BKX has rallied up into the very important $66-67 price level. This price level is important based on the principle of polarity, which simply means that once an area of demand is broken, that same level becomes an area of supply (and vice versa). We can see this principle in action in the chart below. Notice in 2010 and 2011, sellers showed up in the area of $55-56, driving prices downward. This area of supply was overcome in early 2013. Low and behold, during the most recent sell0ff, buyers stepped in at that same level over three years later. Investor memory and psychology are real forces within the marketplace.
Under those same forces, we find BKX up against another point of polarity. For over a year, the $66-67 level is where buyers provided demand for this important sector. This level was broken in late 2015 and is now expected to be an area of supply that must be overcome for the overall market to continue upward.
Here’s the daily chart. We can see the breakout from three days ago. We can also see that price is right up against the point of polarity at $66-67. What happens next is extremely important in signaling the next move for U.S. equities.
If buyers can drive BKX over $66-67 and sustain above it, that bodes well for the prospects of U.S. stocks in general. If there are more sellers than buyers right here, causing price to fall towards new demand, then we can expect renewed weakness within the overall U.S. stock market.
Keep an eye on this one.
Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions.