Archive for October, 2011

Can Bank Stocks Get Any Cheaper?

Posted in Keefe Bruyette & Woods U.S. Bank Index (BKX) on October 24th, 2011 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

While the aversion to banks stocks persists, the real question is whether there is any hope of a tradable rebound. Amid continued concerns over their exposure to troubled real estate loans, and with worries of counterparty “risk” to European banks a “front burner” issue, bank stocks remain depressed.

Of course, a lot of bad news as well as low expectations for any good news in the foreseeable future may already be “priced into” the current depressed evaluations. In addition, a recent spate of quarterly earnings reports was at best a “mixed bag”. That being said, when looking at a weekly chart of the Keefe, Bruyette & Woods U.S. Banks Index (BKX), it appears that key “channel bottom” support at 32.56 held with oversold conditions present. In addition, it may well turn out that a small bullish reverse “Head & Shoulders” pattern targeting 47.50 could be developing (better seen on daily charts).

While this technical set-up offers the opportunity for a near-term reversal to the upside in bank stocks, the next important question is whether a recovery in bank stock prices has any “legs” to it beyond that being offered by the small bullish reverse “Head & Shoulders” pattern.

The answer to that question may come with a test of primary downtrend resistance now located at the 44 level which is, interestingly, below the target of the small reverse Head & Shoulders pattern. More clarity would be required to prompt investors to force a break above 44, or to the 47.50 target level. But a swath of domestic political rhetoric as the 2012 Presidential elections approach will likely affect the intermediate-term outlook. In addition, a series of revised assessments as to the real and/or perceived stability of the European banking system will likely be a major factor.China, with far less clarity due to skepticism over their accounting practices, could be a “wild card” as well.

Over the short-run, however, bank stocks could begin to inch higher.

Approaching Retest of Key “Neckline” Resistance on the S&P 500 Index

Posted in The S&P 500 Index (SPX) on October 16th, 2011 by admin – Be the first to comment

By Jim Donnelly, Olson Global Markets

After a volatile two-month tug-of-war between buyers and sellers, the S&P 500 index (SPX) now appears to be aimed for a “retest” of key “neckline” resistance located at the 1,275 level. Although overbought conditions are nowhere to be found, the likelihood of a failure at or near the 1,275 appears to be a good bet.

Similar technical circumstances were present in the aftermath of two bearish “Head & Shoulders” patterns in 1999-2001 and 2006-2008; and in two bullish “reverse Head & Shoulders” patterns in 2002-2003 and 2008-2009. In each case, the subsequent “retest” of neckline resistance or support (depending on the formation) resulted in a failure to break beyond.

Although overbought conditions on weekly charts were present for the May 2008 neckline retest, overbought conditions were not present during the May 2001 retest. Moreover, oversold conditions were not present for the August 2003 retest, but came close to being so during the July 2010 test. These observations suggest that overbought or oversold conditions are not necessarily indicative of whether a “break” will or will not occur.

What appears to be important, however, is the neckline test itself, particularly during periods of less-than-ideal levels of investment or political clarity. This uncertainty is one key reason why the Volatility (VIX) has maintained an unusually high level of readings since July of this year.

While it is entirely possible that a “break” above neckline resistance could occur “this time”, the price activity of the SPX over the past dozen years or so suggests that it won’t.