Evidence From Bank Stocks That This Is Still A Counter-Trend Rally by Eric Bush, CFA – Gavekal Capital Blog

The S&P 500 is within spitting distance (about 4%) of the all-time high set back in May. The rally over the past five weeks has been impressive. The S&P 500 has gained nearly 11% since February 10th. So is this the start of a new bull market or a counter trend rally within a correction or bear market? Regular readers know that we have been pretty adamant that we believe we are in the midst of a counter-trend rally (see here, here, and here). Let’s add another feather to that cap by looking at the performance of large US banks.

One of the many signs of a healthy bull market is when financials, and notably large banks (now categorized as “other diversified financial services” in many cases) are outperforming the general market. When the JPMorgan’s, Bank of America’s and Goldman Sachs’ of the world are doing well, generally that is a good sign for the stock market in general. One of the issues we have with this rally is that even though these banks have outperformed, the rally has taken them directly back into major resistance levels and are the overall trend for these bank stocks remains down. As you will soon see, the patterns in these charts look a lot like the worst case scenario for many biotech stocks.

Bank of America has rallied 7% MTD but remains down over 20% YTD. BofA has put in a pretty class top formation as it has failed through both the high-performance and regular bullish support lines that were in place since 2012. This latest rally has brought BofA right back to what as previous support and which now looks like resistance. We would be very surprised if BofA could break through overhead resistance to new highs anytime soon.

Bank Stocks

Citigroup has rallied 10% MTD but is still down over 17% YTD. You will notice that the chart for Citigroup looks very similar to BofA’s chart. Citigroup has put in a long-top that has was started in 2013. It has now broken through several levels of support and the latest rally is again just bring this stock back into resistance levels. The most likely next move for Citi, in our opinion, seems to be downward.

Bank Stocks

JPMorgan has only rallied 4.3% MTD but is also only down 11% YTD. The stock chart for JPMorgan is certainly better than the previous two charts. Like Citi and BofA, JPMorgan seems to have been putting in a substantial top since 2013 and has crashed through the high-performance and normal bullish support line. The saving grace for JPMorgan, at least compared to the previous two stocks, is that it remains in the trading range it has been in since 2013. Unlike the other two bank stocks, support in the range hasn’t given way yet and the stock hasn’t started in a clear downtrend. This means there is still a decent chance that this stock could break out of the range to new highs. However, given the similarities in chart pattern to BofA and Citi, we would say there is a much greater probability that JPMorgan falls lower through support rather than break higher to new highs.

Bank Stocks

Lastly, we have Goldman Sachs which is 2.2% higher MTD and is down 15% YTD. You will immediately notice how similar the chart pattern is again. Goldman has been in a trading range, that looks like a top, since 2013 and has broken through both the high-performance and normal bullish support line. The best news for Goldman Sachs is that the latest rally as occurred at previous support levels at E. This has stopped the bleeding for now. The question for investors is if E will hold or if it will give way like it did for BofA and Citi.

Bank Stocks

Bank Stocks

We like to say that stocks correct through price or through time. BofA and Citi are clearly going through a correction while JPMorgan and Goldman are holding out that its correction will mainly occur through the passage of time. Regardless, this group of bank stocks is not leading the market at the moment and this is one more reason why we continue to believe we are in a counter-trend rally. Don’t worry dear reader, as soon as we no longer hold this belief you will be the first to know.