Can The KRB Bank Index Break Above Key Downtrend Resistance?

By Jim Donnelly, Olson Global Markets

Most analysts believe for the overall stock market to extend higher and for the economy to grow, a healthy banking system is a must. And for the banking system to stay healthy, it must have the opportunity to make profitable loans at a reasonable “spread” (over the bank’s “cost of money”.) With the yield curve steepening over the past few weeks, the bullish outlook on banks and bank stocks has improved. Last week’s yield curve steepening, although more costly for long-term borrowers, has helped banks capitalize on wider loan margins. That, in turn, can be seen by a rise in the KBW bank Index (BKX) since the first week in June.

With the Jackson Hole conference slated to be held later this month, there is always the possibility the Federal Reserve could announce the initiation of another round of QE, or an extension to “operation twist”, which could reverse the recent yield curve steepening. On the other hand, an outline of policy change by the ECB’s Mario Draghi could take the pressure off Fed Chairman Bernanke to do anything at all, particularly in front of the November elections.

In turn, the absence of any new tinkering by the Fed could help lift the BKX above key downtrend resistance at 48.50 and “take aim” at an eventual test of “mid-channel” resistance currently sitting at 57.70 (but rising over time).

From a technical point of view, the potential of a “break” above 48.50 on the BKX is there, particularly since overbought conditions are not present. That being said, a worsening of the jobs data over the near-term could force the Fed’s hands to make another policy move. That, in turn, would likely mute the upside potential for bank stocks, and equity prices in general.

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