Who doesn’t remember the big bank shank of 2007-09? It’d be hard not to. Yet it hasn’t paid one ounce to be bearish on said stocks for more than a trade since the key higher low (versus the absolute low in March 2009) of September 2011.
Traders and investors have a choice: Either respect price action for what it is, or fight it with all sorts of rationalizations that might eventually lead to insanity.
As it relates to the bank stocks — and more specifically the KBW Bank Index (BKX) — the trough-to-peak performance of the rally from October 2011 to March 2013 measured around 75%, and at least thus far remains in its uptrend.
Looking at the rally’s slope, note that it began to steepen during its latest leg higher, which kicked off in November 2012. I often point out that eventually steep slopes will mean-revert, which I also fully expect to happen in the bank stocks at some point in coming months.
Closer up on a daily chart of the KBW Bank Index, we note that last week’s low on April 18 coincided with a rising 100-day moving average, which also completed a bull flag formation. The rally since last week’s low has been relentlessly strong, which brings me to my main point of the article: It’s simply too early to short bank stocks.
Without any confirmed weak price action, the path of least resistance remains higher for the time being … though that’s not to say things can’t change in a flash.
Things don’t look much different among individual bank stocks. Just look at the chart of Citigroup (NYSE:C), which is rallying off of a tight two-week consolidation pattern and racing toward its 2013 highs.
Or the chart of Bank of America (NYSE:BAC), which last week held its July 2012 uptrend like a champ, flashed a bullish hammer candle on April 18 and has rallied vertically since.
This type of action in the bank stocks and in the BKX, to me, does not favor any sort of short-side stab quite yet. Going into earnings season, bears had a chance to make some hay in select names; however, the rally off of last week’s lows will force them to wait for better setups while upside potential remains.