Since early October I’ve given so many warnings about the stocks market it’s almost making me sick already. No, not because the market might correct or even crash, but because I must be starting to get annoying to all of you. The intention of my warnings is to make you aware that there are risks and that you do everything that’s in your power of protecting your wealth (see Do NOT underestimate the risk). This is why we’re here, aren’t we? Making money is important, but protecting it, this is an even more important task in my opinion.
Let’s take a look at a banking sector. I wrote a post about financial sector a few weeks ago and that we are looking to short it under the right conditions (see Sectors on the watch to short). I was also going on about yields falling or bond prices rising in the intermediate term (see From yield curve inversion to bond squeeze?).
What if the FED hikes for the last time this December and pauses with rate hikes next year? What if the natural consequence is that the banks suffer in the same period? And when banks are trading lower it is never a good sign for the stock market in general!
Today is Friday, so the week is not over yet. Some people think it’s not wise to make conclusions based on incomplete candles. I agree to some extent. Sometimes, if you wait for the week to end and a candle to complete, it might already be too late. If today’s price action reverses this week’s price action, then we might have to revise the thesis. However if it doesn’t, the prices might be much lower by end of the day.
Let me start with a weekly chart of Regional Banks ETF or $KRE.
The price closed at the lowest level in two years, this is also below the peak in 2007 just below the financial crisis. If the price stays below $51-52 level we should expect to see them by at least 10% lower some time in the next couple of weeks. If the stock market correction becomes bigger than what my expectations are, maybe even lower than that, but let’s go step by step.
Next chart is a weekly chart of JP Morgan Chase or $JPM.
This chart clearly looks much better than KRE’s. It’s well above 2008 levels, but it’s also starting to roll lower. Similarly to KRE, we should not be surprised to see a 10% correction if the price doesn’t recover above $105 level very soon!
Then there is Royal Bank of Canada or $RY on the Canadian exchange, not NYSE.
Very similar to JPM, but it’s still holding above crucial support. If it closes below 94, then it might lose the battle with the bears!
While you might think I’m overreacting because these charts might not look too concerning to you, let me show you two banks that look much worse. The first one is Goldman Sacs or $GS.
I think it’s not required to write much about this. In the past month the stock lost about 20% and more than 60% from the peak. This looks ugly.
And the second one is Deutsche Bank, $DBK on XETR exchange.
I guess you came across this chart a couple of times already. It’s in a clear down trend, it looks very ugly and there is no sign of a bottom yet. You might think Deutsche Bank is an exception to the story and that the US banks are much healthier. While this might be true, it doesn’t mean some of your favorite banks can’t fall in prices, Goldman Sachs is a nice example.
I’d love to be proven wrong and see a reversal in the next couple of weeks. This could ignite a huge rally and an opportunity to make very nice gains next year. However, do NOT underestimate the risk.