Can Bank Stocks Get Any Cheaper?

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.

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