The Sector That Will Lead Us to New Highs

If banks continue higher on decent volume, the market should follow


Following a sharply lower opening, stocks rose until late morning but then flatlined for the remainder of the day. The recovery resulted from better economic data, including a stronger U.S. housing market number and better regional manufacturing data.

At the close, the Dow Jones Industrial Average was off a point at 12,982, the S&P 500 rose 2 points to 1,367, and the Nasdaq gained 2 points at 2,966. Volume on the NYSE was again light at just 732 million shares, while only 458 million shares traded on the Nasdaq. Breadth was a standoff on the Big Board, but decliners edged out advancers on the Nasdaq by 1.2-to-1.

In contrast to last fall, the month of February has been a real snoozer. But despite the inability thus far of the Dow industrials to break the magic 13,000 line and the S&P 500 to roar to new highs, some sectors — like the banks — have done very well. Yesterday’s run in the financials of 1% exceeded the advances of other sectors by a wide margin.

KBE Chart
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Trade of the Day Chart Key

We noted the bank breakout on Feb. 3, when the SPDR KBW Bank ETF (NYSE:KBE) popped on a breakaway gap at around $22. 

I wrote: “The drag that the bank sector has had on the market is illustrated by the sharp angle of decline of a bank-only fund… However, starting in January, the negative impact of the bear market in the banks subsided as they broke through both the bearish resistance line and the 200-day moving average.”

Along with price increases, note the gradual increase in volume and the pending new stochastic buy signal. It will have to maintain this increase in volume to make it through the next area of resistance at $22.75 to $23.75. 

But if the banks continue the push to the north, related sectors in the financial group and even construction stocks could follow taking the indices to new highs.

Tomorrow, we’ll examine the technical outlook of some of the related groups.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

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