Regional bank stocks have been on a run of late, but the Regional Bank Index (INDEXCME:KRX) is encountering resistance stemming from 2011.
Over the course of the post-February stock rally, the financial sector has been among the lagging areas of the market. Yes, financial stocks are well off their February lows, but several bank stocks have struggled to make any gains since early June and are still well off their 2015 peak levels. However, in recent days and weeks many areas within the sector have enjoyed breakouts of sorts. Included among them are regional banks stocks and the regional bank industry. This is represented well by the Regional Bank Index (KRX).
Specifically, the KBW Regional Bank Index (KRX) has in the past few days finally managed to surmount the highs reached several times from late May through early August. That said, the coast may not totally be clear for the KRX. That’s because if we scroll back 5 years, we see that the regional bank index is bumping into the underside of the Up trendline stemming from the late 2011 lows.
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As the chart shows, the trendline in question has been a particularly effective one in supporting prices prior to this past January, and repelling them since. The KRX bounced up off the trendline in October 2014 and in January, August and October 2015. Then, in April and May-June of this year, the underside of the trendline served as resistance in repelling the Regional Bank Index (KRX) rally.
Recent hawkish talk from the Fed has presumably boosted financial shares as they stand to benefit from higher interest rates. However, as always, we would caution against basing one’s investment decision-making process on trying to predict what a group of central bankers are going to say or do (especially as they likely have no idea what their course of action will be anyway.)
One useful approach, however, would be to watch prices in financial stocks, not merely to monitor those, but also in an effort to detect potential clues as to the likely movement of rates. We often say that the market is an unparalleled discounting mechanism. Any potentially worthwhile inputs will be filtered through prices and may provide a clue on interest rate policy.
If KRX prices are able to reclaim the top of the post-2011 trendline, then not only is more upside opened up immediately in the sector, but it may be a vote of confidence for a continued hawkish tone out of the Fed. If the index is rejected here, then not only is further upside in financial shares going to be a challenge, but the interest rate pendulum may again swing back to the doves.
Thanks for reading.
Twitter: @JLyonsFundMgmt
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Author may have positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
