Bank stocks came under pressure Friday after the May jobs report revealed that only 36,000 new jobs created. Investors took the weak jobs report as a clear signal that the Fed will not proceed with a rate hike in June (or anytime soon). As a result, bond yields dropped and banking stocks sold off in kind.
Bank stocks such as Citigroup Inc (NYSE:C), on a daily closing basis, managed to hold on to thinning support once more, but overhead resistance is so heavy that the path of least resistance looks overwhelmingly lower.
Over the past couple of weeks, Fed speakers were busy signaling a hawkish tone and pointing toward a June rate hike. While Fed fund rate futures never really gave a June bump much of a possibility despite the hawkish rhetoric, bank stocks — which prefer higher interest rates and in particular favor a steepening yield curve — rallied nicely. This in part helped keep America’s major equity indices afloat.
The weak May jobs report now puts in serious question a possible June rate hike, and thus also the recent rally in banks, including C stock.
Citigroup (C) Stock Charts
To be sure, bank and other financial stocks as a group have flagged plenty of relative weakness versus the S&P 500 for some time — since 2013, and more notably, since summer 2015. This is well-represented on the ratio chart of the Financial Select Sector SPDR Fund (NYSEARCA:XLF) versus the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
On this ratio chart, we see that in late May diagonal resistance (red dotted line) was reached and that the entire price action since early the early 2016 lows took the shape of a rising wedge pattern. Last Friday, this rising wedge pattern broke.
This is not a bullish sign from where I sit.
Looking at the daily chart of Citigroup stock, we see that shares were rejected once more last week at obvious horizontal support as marked by the black dotted line. The topping formation that formed in 2015 and ultimately led to the sharp early 2016 selloff — which broke the stock below the black dotted line — remains intact. In fact, the rally off the 2016 lows back to this horizontal line of resistance may have just been an important retest of former support (which is now resistance).
While more aggressive traders could look to slip into new short positions in C stock, more risk averse players may first want to see at least a daily close below last Friday’s lows near $44.30, which would also qualify a break of the rising wedge pattern. A next downside target would then open up around the $40 mark.
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