The financial sector is the largest and likely most important part of the S&P 500, which is why many professional investors and traders watch brokers, insurance and bank stocks very closely.
Financials are often a good clue for what’s to come, particularly if they are showing divergence from the broader market or leading rallies or selloffs. Either way, it pays to always watch bank stocks and other financials, especially considering they are the nerve center of the economy and a large part of many equity indices.
The KBW Bank Index (BKX), a good measure for the performance of bank stocks, broke through lateral resistance to fresh year-to-date highs on Nov. 21st, and is now basing above its August highs. From a pure price action point of view, this movement constructive. The surge is backed up by single-name stocks within the financials space that are looking good technically, not to mention rising interest rates.
Bank of America (BAC) is the index’s second-largest holding, with 8.52% as of Dec. 2nd. BAC has had a steep rally recently, and with no medium-term reference points above, it doesn’t look as technically juicy as some of its rival bank stocks heading into the year-end.
Citigroup Inc (C), on the other hand, is 9% of the KBW index and the largest holding in BKX. While still stuck in a multi-month trading range, C stock bumped into a resistance line last week around the $53.50 area. That’s the third time this year it has reached that resistance line, and with momentum on its side the stock looks ripe to break past resistance in coming weeks.
And then there’s Goldman Sachs (GS). Although not a part of the KBW index, GS poked to a new year-to-date close on Monday as it pushed above a resistance point in place since August. This type of price action is likely bullish into year-end, although some correcting price movement is possible in January.
Beyond that, my base case is that we’re in a new secular bull market. Margin interest rates will continue to rise, which is supportive of bank stocks.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.