Don’t Give Up On The Banks Just Yet

By Jim Donnelly, Olson Global Markets

One of the curious things about this year’s correction phase of last year’s equity recovery has been the limited downside price action that has occurred thus far. This, of course, is in light of a number or worrisome forecasts that have been made recently. Students of Elliott-wave analysis, for example, are particularly gloomy regarding the direction and downside price potential of equities in general.

Fundamentalists continue to be concerned over the impact that potential commercial real estate write-downs might have on a number of regional banks, conjuring up thoughts of, perhaps, another big government bank “bailout”.

That said, it may be worth taking another look at the Keefe, Bruyette & Woods U.S. Bank Index (BKX) which continues to form what appears to be a bullish reverse Head & Shoulders pattern. True, it has taken a while for this pattern to develop, and it is equally true that the Fed has apparently begun the process of removing monetary stimulus with the largely symbolic raising of the discount rate.

Both of these observations are reasons to give pause to investors. Nevertheless, the prospect of removing “free money” may actually start bankers thinking about doing what bankers are supposed to do: lend money! This is an easy thing to say, especially given the deterioration of credit quality that has no doubt occurred in recent years.

Still, the bullish reverse Head & Shoulders pattern that appears to be forming on the BKX index suggests that a break above key “neckline” resistance at the 48.50 level, if it occurs, could give way to an impressive rise in that index up its lofty “objective” of 79.50. If such a break does occur, the recent corrective phase in equity prices may well come to an end more quickly than most expect.

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