Charted Territories

By Jim Donnelly, Olson Global Markets

Despite overbought conditions on the weekly time frame, the Keefe, Bruyette & Woods U.S. Bank Index (BKX) “nudged” above key downtrend resistance at the 43.90 level last week. Ironically, last week’s BKX rally moved in the face of Moody’s Investment Service’s warning that it might soon downgrade 17 of the world’s largest banks, including a number ofU.S.banks. To underscore their warning, Moody’s cited fragile funding conditions as well as rising regulatory headwinds as possible threats. That being said, their warning appeared to have little effect on bank share prices.

Although overbought conditions are present on weekly charts, longer-term monthly charts (which are far form being in an overbought condition) suggest that a lot more upside is in store for the BKX over time. Perhaps the announcement of a $26 Billion settlement with five big U.S.banks over the “robo” signing foreclosure ordeal removed a big “uncertainty” from the market. Perhaps a jump in U.S.commercial and industrial (C&I) loans at the expense of European banks has helped. Perhaps another drop in initial weekly jobless claims to 348,000, its lowest level in four years, helped as well.

In any event, last week’s “nudge” above the 43.90 level on the BKX, although modest, could be a hint that further gains in bank shares are coming. If so, the next key area to focus on is it’s “mid-channel” resistance currently sitting at 54.

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By Jim Donnelly, Olson Global Markets

In the aftermath of Fed Chairman Ben Bernanke’s pronouncement to extend the 0% fed funds policy through at least late 2014, it appears that our central bank’s true concern is the threat of “deflation”, not inflation. Moreover, the battle to prevent deflation will likely be strengthened by a new round of quantitative easing (QE) by the Fed later this the spring; and by a new round of ECB lending measures providing cheap money to European banks within a month. Broader, more relaxed collateral standards inEuropesupport this particular outlook.

After these measures are implemented, the resulting outcome would likely be a period of reflation that should be evidenced by a rise in both equity and commodity prices. Although weather related events accounted for a large portion of the hike in meat and grain prices last year, an attempt to grow the monetary aggregates in theU.S.andEuropecould play a much bigger role in commodity price gains later this year.

The beginning of a move toward higher commodity prices may have already been triggered by a break above key downtrend resistance at the 305 level on the Reuters/Jefferies CRB Total Return Index last month.

Favoring a rise in the CRB index is a set of technical oscillators that are positioned bullishly on weekly charts. If prices do rise, a steeper yield curve would likely ensue. That would entice banks, in theory, to ramp up lending efforts in order to take advantage of the wider interest rate spreads. At the same time, an expansion of money supply would likely put downward pressure both the dollar and Euro (versus a basket of other currencies) this year. Most of this scenario would be good for the economy and equity prices, but not so good for longer dated bond prices.

In any event, the upside “potential” for a gain in the CRB Index appears to be reasonably good. It is worth pointing out that primary downtrend resistance currently sits at the 340 level, but declines over time. Hitting this particular objective would suggest that only a modest amount of commodity inflation is in the cards for the months just ahead. That being said, the next key level to consider is the “backside” of former trend line support currently sitting at the 387 later, but rises over time. Hitting this second target would suggest that a more pronounced ascent in inflationary conditions should be expected.

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