Stocks, especially financials, ripped higher in the wake of Wednesday’s dovish Federal Reserve policy announcement. Although officials opened the door to rate hikes as soon as June — which would be the first increase in the cost of money since 2006 — they aggressively downgraded their expectations of where interest rates will end the year in response to soft economic data, the strong rise of the dollar and weak inflation readings.
Instead of the four rate hikes in 2015 they expected back in December, they are now looking for just two.
For a market with a severe addiction to the Fed’s cheap money, this is great news. But the situation remains fragile: The NYSE Composite continues to be constrained by multimonth resistance, breadth is tepid and sentiment is extended. Plus, let’s remember why the Fed pulled back: The economy is stuttering.
Outside of stocks, bond traders reacted to Wednesday’s news by bidding up long-term Treasury bonds — pushing down yields in a sign of apprehension about the future. That’s narrowing the net interest margins of the banks as the gap between short- and long-term rates closes. As a result, big bank stocks are looking vulnerable here.
Here are five financials to keep an eye on now that the buying interest spurred by the recent “stress test” results have faded.
Vulnerable Financials: Bank of America Corp (BAC)
Bank of America Corp (NYSE:BAC) is probably the weakest of the bunch, down 13% from its December high as it collapses below its three-month triangle pattern.
A retest of the January lows looks likely — a 5%-plus decline from here.
Vulnerable Financials: KeyCorp (KEY)
Regional bank stocks in general — as represented by the SPDR S&P Regional Banking ETF (NYSEARCA:KRE) — are hitting resistance from their December highs.
After an impressive rise out of January, KeyCorp (NYSE:KEY) shares have stalled out over the past week as technical momentum indicators roll over. A move down to $14 a share to fill a gap looks likely, which would be a 5% drop from here.
Vulnerable Financials: Citigroup Inc (C)
Citigroup Inc (NYSE:C) is trading in a pattern similar to BAC, but hasn’t yet broken down out of its multimonth triangle pattern.
With the full stochastic indicator rolling over in a big way, I’m looking for a breakdown to put the $49-$50 level — the gap decline from January — in play for a 6% decline.
Vulnerable Financials: JPMorgan Chase & Co. (JPM)
It’s a similar story with JPMorgan Chase & Co. (NYSE:JPM): A multimonth triangle pattern that will likely be broken to the downside.
The first stop would be support near $59-$60, representing both the 50- and 200-day moving averages. That would be worth about a 5% drop from here.
Vulnerable Financials: Goldman Sachs Group Inc (GS)
Goldman Sachs Group Inc (NYSE:GS) is contending with multimonth resistance. The stochastic is trying to turn higher, but as a buyer of GS stock, I’d be worried about a headfake reversal of the type seen in late December.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
