Is The Three Day Rally In The Big Banks Signal Or Noise? by Bryce Coward, CFA – Gavekal Capital Blog
Much fanfare has been made over the three day rally in the big banks which was only compounded yesterday with the Fed giving the largest banks the ‘all clear’ to return capital to shareholders via dividends and stock buybacks. A read of the financial press or a listen of analyst soundbites would have one believing the banks are on the cusp of or have already begun a bona fide bull market. Yet, our point & figure charts, which are designed to filter out the noise, paint an entirely different story. Our point & figure charts show that the world’s largest banks for the most part remain in clearly defined, long-term, persistent downtrends, or have completed a topping phases which usually precedes a dangerous decline in prices. Only one giant bank has not already completed the initial topping phase and that is JP Morgan Chase. Given the negative trend of the other banks we would put a high probability on JP Morgan’s top resolving itself to the downside. In our opinion, deploying capital into stocks with charts like these would be a high probability way to shrink said capital, regardless of headlines about dividends, share buybacks or Brexit not actually occurring.
In the rest of this post we show the absolute point & figure charts for the five largest banks by market cap in each developed market region: Americas, Europe, and Asia. As a reminder, each X represents a 2.5% increase in price and each O represents a 2.5% decrease. In order to move from an ascending column of Xs to a descending column of Os, or vice versa, the stock must achieve a 7.5% cumulative price change. This “three-box reversal” method assures that the noise of daily price fluctuations is filtered from the chart so that only the long-term trend remains. Furthermore, this method of plotting price against volatility eliminates completely any dimension of time from these charts, which further illuminates the trend in price regardless of the individual time dimension that price trend is on.
Largest 5 North American Banks:
Wells Fargo: $257bn market cap; long-term topping process complete; at significant risk of further substantial price decline; no base of support
JPMorgan: $239bn market cap; etching out a long-term top; at significant risk substantial price decline if the topping process completes; a weak chart, but by far the best looking among the group
Bank of America: $153bn market cap; long-term topping process complete; significant overhead resistance; at significant risk of further substantial price decline; no base of support
Citigroup: $137bn market cap; long-term topping process complete; significant overhead resistance; at significant risk of further substantial price decline; no base of support
RBC: $90bn market cap; initial phase of long-term topping process complete; strong rally back into overhead resistances; at significant risk of further substantial price decline; no base of support
Largest 5 DM Europe Banks:
HSBC: $128bn market cap; long-term downtrend firmly intact; significant overhead resistances; at significant risk of further substantial price decline; no base of support
Lloyds Banking: $75bn market cap; long-term downtrend firmly intact; strong rally back into significant overhead resistances; at significant risk of further substantial price decline; no base of support
Banco Santander: $69bn market cap; long-term downtrend firmly intact; significant overhead resistances; at significant risk of further substantial price decline; no base of support
BNP Pariba: $69bn market cap; long-term topping process complete; rally back into significant overhead resistance; at significant risk of further substantial price decline; no base of support
BNP Pariba: $58bn market cap; long-term topping process complete; significant overhead resistance; at significant risk of further substantial price decline; no base of support
Largest 5 DM Asia Banks:
Commonwealth Bank: $96bn market cap; etching out long-term top; significant overhead resistance; at significant risk of further substantial price decline; weak base of support
Westpac: $74bn market cap; initial phase of long-term top complete; significant overhead resistance; at significant risk of further substantial price decline; weak base of support
Mitsubishi UFJ: $69bn market cap; long-term top complete; significant overhead resistance; at significant risk of further substantial price decline; weak base of support
ANZ: $69bn market cap; long-term downtrend firmly intact; significant overhead resistances; at significant risk of further substantial price decline; no base of support
National Australia Bank: $51bn market cap; long-term downtrend firmly intact; significant overhead resistances; at significant risk of further substantial price decline; weak base of support that has recently been broken
Bonus Charts
Goldman Sachs: $67bn market cap; long-term top complete; significant overhead resistance; at significant risk of further substantial price decline; no base of support
Morgan Stanley: $53bn market cap; long-term downtrend firmly intact; significant overhead resistance; at significant risk of further substantial price decline; no base of support
