(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Banks have been declining in recent days, and there may still be more pain to come. The KBW NASDAQ Bank Index has been walloped over the last few days, falling by nearly 10% from an intraday high of 116.61 on March 12, to 104.50 in early afternoon trading on March 23. But signs are emerging that the KBW Index could fall further, perhaps to around 99.75, a decline of another 4.5%.
But the sell-off could be steeper for some of the major banks. Wells Fargo & Co. (WFC) could see its shares fall by roughly 9%, while JP Morgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) could decline by about 4%. An article on Investors on March 8, noted the bank's stocks were setting up for a pullback and could be set to fall over the short term. (For more, see also: Why Bank Stocks Are Ready for a Short-Term Pullback.)
The KBW Index chart shows the index has room to fall to 99.75 before hitting the next support level while also breaking an uptrend. It sets up a negative reflection for the other banks in the group.
Wells Fargo stock has fallen hard since peaking in mid-January, and the stock is approaching a critical support level around $51. Should the stock fall below that technical support at $51, the stock could decline towards $46.75. It would result in a decline of about 9% from its price of $51.40 in early afternoon trading on March 23.
JP Morgan shares have already dropped below its short-term uptrend, and that sets up a further decline towards $104, a region that offers both a technical support level and an uptrend. The stock, for now, has put in what looks like a triple top or head and shoulder pattern on the daily chart, which can be seen as bearish reversal patterns. A fall below support at $104, could send shares sharply lower, perhaps towards $94. (For more, see also: Top 4 Bank Stocks for 2018.)
Banks Not Cheap
But on top of the poor technical setups, the banks are expensive on a fundamental basis, versus historical levels. In fact, JP Morgan, Citigroup and Bank of America are all trading at three-year highs on a price to tangible book multiple.
For now, the bank stocks are continuing to exhibit signs of a group that is still heading lower, with valuations that do come cheap.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.