Is There Any Hope For Bank Stocks?

By Jim Donnelly, Olson Global Markets

In front of the release of August’s employment data this Friday, a series of economic reports released over the past two weeks has investors deeply pessimistic once again. As a result, the “run-to-safety” trade into U.S. Treasury securities pushed interest rates (across the yield curve) to new lows before a correction occurred toward the week’s end. Contributing to investor fears was a sense that the Federal Reserve has done most of what it could do, and most of what was expected of it to help nurse the struggling economy back to recovery. This wide-spread appraisal appeared to gel in the wake of last week’s central bank’s conference in Jackson Hole, Wyoming, and despite Fed Chairman Bernanke’s pledge to do even more.

Moreover, mounting pressure now appears to be shifting toward Washington to utilize more fiscal stimuli in front of the elections, a time that is considered too ticklish to get anything accomplished for many an incumbent.

It is no wonder that technical analysts are worried that a bearish “Head & Shoulders” pattern on the Dow Jones Industrial Average could play out to the downside. If it did, it would make investor sentiment even worse, despite last quarter’s better-than-expected earnings reports.

Since most analysts believe a legitimate turn-around in both the stock market and in the economy requires a healthy banking system, a renewed look at the Keefe, Bruyette & Woods U.S. Bank Index (BKX) is in order. With oversold conditions present, it is important to note that the BKX is now approaching a test of two key support areas that are very close to each other. The first is trend line support drawn off the lows since August 7, 2009 that sits at 42.75. The second is “channel bottom” support at 41.75 drawn off a series of highs and lows that date back to March 6, 2009. Although trend line support will change very little over the coming months, it is worth noting that “channel bottom” support does rise over time.

As a result, the 41.75 level holds great importance for the BKX and the overall condition of equity prices over the intermediate-term. If it holds and turns the Keefe, Bruyette & Woods U.S. Bank Index to the upside, a giant sigh of relief should occur for many investors. A solid break below, however, would be a big negative and a major concern.


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