Bank Funds Give Up Last Gains of the Trump Rally

The SPDR S&P Bank Index Fund (KBE) has relinquished the last gains of the rally that started when Donald Trump was elected president in November 2016. That's got to hurt after a roaring uptrend that lifted this market group to 10-year highs in early 2018. Bank stocks have struggled since that time, with a few sector leaders posting new highs while the majority ran in place, held down by trade wars and a tax cut that generated buybacks but little business expansion.

The Federal Reserve has undermined banking group performance in the past two years as well, with plummeting interest rates making it harder for the industry to turn profits. Taken together with other headwinds, it's wise to assume that the uptrend that started in March 2009 has now come to an end. Even so, the group should face less downside pressure during this economic contraction than the last one because the banks built excellent cash positions to survive the storm.

Chart showing the share price performance of the SPDR S&P Bank Index Fund (KBE)

The bank fund sold off from $60.41 to $8.90 during the economic collapse and bounced into the upper $20s in 2010. It took three years to mount that resistance level, with industry reform putting the brakes on profitable but risky strategies. A 2013 breakout failed to attract buying interest, yielding dead sideways action that finally ended in the fourth quarter of 2016. The post-election uptrend unfolded in two rally waves, lifting into the highest high since October 2007 in February 2018.

A sell-off through the rest of the year settled at a two-year low, ahead of a 2019 bounce that posted a lower high in December. Price action since that time has completed a head and shoulders breakdown, signaling a downtrend that is targeting the mid-teens as a measured move. If this prediction plays out, the bank index will drop into the.786 Fibonacci retracement level of the nine-year uptrend.

Chart showing the share price performance of JPMorgan Chase & Co. (JPM)

Dow component JPMorgan Chase & Co. (JPM) has led its peers since the last bear market, when it posted a massive double bottom reversal in the mid-teens. Even so, it took four years to complete a round trip back to the 2007 high, with the company standing at ground zero in the hunt for scapegoats that followed the economic collapse. They paid heavy fines during that period, setting the stage for a 2013 breakout that reached 2000 resistance in the mid-$60s in 2015.

A 2016 breakout generated heavy buying interest, lifting in a multi-wave uptrend that stalled near $120 in March of 2018. It carved an inverse head and shoulders pattern with the neckline at that level and broke out once again in October 2019. JPMorgan started 2020 on a high note, posting an all-time high at $141.10 on Jan. 2, ahead of a trading range and February breakdown. The stock is now trading close to a three-year low and could eventually test deep support near $70.

Chart showing the share price performance of Banco Santander, S.A. (SAN) 

Madrid-based Banco Santander, S.A. (SAN) highlights unique and deadly geographical threats to the industry as a result of the pandemic. Spain currently has more than 11,000 infected by the virus, bringing the country to a virtual standstill. The stock is reflecting this major crisis, looking like bankruptcy is just around the corner. At the least, this well-known institution may need a bailout to continue operations in coming months.

As you can see from the long-term chart, the stock failed to recover after the 2008 bear market, with European growth trailing the United States by a wide margin. The bounce into 2010 marked the highest high in the last decade, ahead of a long series of lower highs and lower lows that broke 2009 support in 2016. Ominously, Santander stock has just broken support going all the way back to 1990, raising the odds that the bank will close its doors in coming years.

The Bottom Line

Banks have ended their multi-year uptrends, posting lower highs and breaking down in response to the pandemic and plummeting interest rates.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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