The SPDR S&P Bank ETF (KBE) rallied to an eight-month high last week, underpinned by hopes for a strong economic recovery and higher interest rates following the distribution of COVID-19 vaccines. The rally tracks the ongoing rotation out of pandemic beneficiaries and into sectors most affected by the virus. However, wishful thinking is contributing to the uptick because many folks will likely refuse to take vaccines and high unemployment could take several years to overcome.
- Many big banks have rallied to eight-month highs in November.
- The advance has now reached price levels that favor reversals.
- A sector recovery isn't likely in the short term due to high unemployment and low interest rates.
Dow component JPMorgan Chase & Co. (JPM) has carved the strongest technical pattern since posting a three-year low in March and is finally trading above the June peak. That is not the case with Bank of America Corporation (BAC), Citigroup Inc. (C), or Wells Fargo & Company (WFC), highlighting uneven performance and the likelihood that buying interest will run out of gas soon. In fact, Citi looks like a promising short sale candidate right here rather than a value play.
In addition, the Biden administration likely won't be friendly to the banking sector, with hard feelings since the 2008 economic collapse still guiding policy objectives for Elizabeth Warren and other progressives. Of course, that makes no sense because the industry's role as convenient scapegoat is outdated, with big tech behemoths posing a far greater threat to capitalism and democracy than the denizens of lower Manhattan.
A short sale is the sale of an asset or stock the seller does not own. It is generally a transaction in which an investor sells borrowed securities in anticipation of a price decline; the seller is then required to return an equal number of shares at some point in the future. In contrast, a seller owns the security or stock in a long position.
The SPDR S&P Bank ETF topped out at the .786 Fibonacci retracement of the 2007 to 2009 decline at the start of 2018 and entered a downtrend that initially found support in the mid-$30s in December. It posted a lower high in the fourth quarter of 2019 and turned lower once again, breaking 2018 support during the pandemic decline. The fund bounced off that seven-year low and stalled at the 50-day exponential moving average (EMA) in April, ahead of a successful support test in May.
The subsequent uptick failed at the 200-day EMA in the mid-$30s in June, while the rally that started earlier this month has established new support at that level. However, price has now reached tough resistance at the 200-week EMA, which was broken on heavy volume in February. That level has also aligned with the .618 Fibonacci selloff retracement level, raising the odds for a reversal and pullback that fills the November gap.
JPMorgan Chase stock completed a round trip into the 2000 high at $67.17 in 2015 and broke out following the 2016 presidential election, lifting to $119.33 in February 2018. It cleared that resistance level in October 2019 and headed higher, posting an all-time high at $141.10 on the first trading day or 2020. The stock failed the breakout in March, dropping to the lowest low since the election, ahead of a bounce that reversed in June after mounting the 200-day EMA.
The Nov. 9 gap cleared resistance, lifting the stock to an eight-month high, where it has been grinding sideways in a small pennant pattern. Unlike the banking index, JPMorgan Chase stock is now trading above the 50- and 200-week EMAs, offering greater upside potential. However, the rally has now reached resistance at the failed breakout and .618 Fibonacci selloff retracement level, setting the stage for a reversal that fills the November gap.
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. The Fibonacci retracement levels are 23.6%, 38.2%, 61.8%, and 78.6%.
The Bottom Line
Bank stocks have gained ground in November, in hopes for a strong economic recovery, but it looks like the rally is running out of steam.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.