KBW Bank Index Threatens To Break Lower

By Jim Donnelly, Olson Global Markets

With the Keefe, Bruyette & Woods U.S. Bank Index (BKX) already off 8.6% from its September 14 high (6.9% of which has occurred since the election), the BKX index is on the verge of breaking below key trend line support at 46.15. If it does, it will increase the “risk” of a possible test of key “channel bottom” support that currently sits at 40.

What is a bit worrisome is that the S&P 500 Index, which has lagged modestly behind the BKX, has posted declines of 7.8% from its September 14 high, and 4.8% since the election. If the relationship holds, more downside price action in the S&P 500 will likely follow. Since most analysts believe that a healthy banking system is a must for the equity markets, another move lower could be a hint that economic growth may soon begin to decelerate.

Clearly, hopes of a bipartisan agreement to head off the ills of the “fiscal cliff” are a factor. However, in recent days, increased military tensions in Gaza, along with a warning by the International Atomic Energy Agency that suggests Iran is technically in position to rev up its production of enriched uranium have added to investor uncertainty. This, of course, is happening just in front of the busiest retail season of the year.

For now, keep an eye on the Keefe, Bruyette & Woods U.S. Bank Index (BKX). A bearish trend line break could trigger higher price volatility, reduced trading activity and an extension to the downside on the S&P 500 Index as even more investors move to “the sidelines”.

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