Many bank stocks gained ground for the first time in six sessions on Thursday, taking a much-needed break from relative weakness that has infected the sector since JPMorgan Chase & Co. (JPM) reported first quarter earnings in mid-April. The largest banking fund is back down to the level posted just three days after the March low, generating a bearish divergence with the S&P 500 Index, which is now trading close to a two-month high.

JPMorgan CEO Jamie Dimon and Morgan Stanley (MS) CEO James Gorman have both advised that they don't expect a V-shaped recovery despite the reopening of businesses now taking place across the United States. Falling interest rates have hurt the earnings outlook as well, reducing margins that grow during periods of rate hikes. Many banks have also been forced to increase reserves due to expected credit losses that seem inevitable during upcoming phases in the pandemic.

Even the oil crash has affected banks, with heavy energy sector loan exposure that will generate defaults if the crude oil contract doesn't continue the current uptick. Taken in total, sector headwinds are likely to persist through the rest of 2020, keeping a lid on the banking group even if the economy stabilizes and most folks go back to work. In the meantime, individual stocks remain vulnerable to continued selling pressure that could test and even break March lows.

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

The SPDR S&P Bank ETF (KBE) rallied out of a three-year basing pattern in the fourth quarter of 2016, entering a modest uptrend that stalled at $52 in February 2018. It sold off to a two-year low in December and turned higher into 2019, lifting into the mid-$40s in February. A November breakout made limited progress before reversing at $48.17 in December, ahead of a downtick that intensified in February 2020 when the virus began to spread rapidly around the globe.

The decline found support at a seven-year low in the low $20s, giving way to a bear flag pattern that posted three highs into 50-day exponential moving average (EMA) resistance above $30. The fund reversed at that barrier on April 30, descending to flag support in Wednesday's session. It has now compressed between resistance at the moving average and support at the trendline, signaling a mixed technical condition that is likely yield a trend move in the next two weeks.

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

JPMorgan Chase stock broke out in November 2016 as well, lifting in two strong rally waves that reached $119 in March 2018. The stock held up relatively well in the fourth quarter sell-off, dropping to a 14-month low ahead of a bounce that completed a round trip into the prior high in September 2019. An October breakout caught fire, posting an all-time high at $141 in January 2020, ahead of a pullback that accelerated into a vertical decline in February.

The sell-off settled at a three-year low in the mid-$70s on March 19, while the subsequent bounce stalled at the 50-day EMA near $104 on April 9. Unlike the KBE fund, JPMorgan stock hasn't posted a higher high since that time, instead grinding sideways in narrow range-bound action between that high and the upper $80s. Accumulation readings have dropped close to March lows during this period, raising the odds that price will soon follow. 

Chart showing the share price performance of Bank of America Corporation (BAC)

Bank of America Corporation (BAC) stock broke out above eight-year resistance near $20 after the 2016 election, entering a two-legged uptrend that stalled in the mid-$30s in March 2018. The stock sold off to a 15-month low in December and bounced strongly, returning to a trendline of lower highs in October. An immediate breakout posted healthy buying interest into December's 11-year high at $35.72, ahead of a modest decline that eased into a vertical trajectory during the pandemic panic.

Like JPMorgan, Bank of America shares bottomed out at a three-year low in March and turned higher, carving a modest recovery wave that stalled at 50-day EMA resistance on April 9. An April 29 breakout attempt failed, giving way to five down days in a row, ahead of Thursday's 49-cent bounce. Accumulation has also slumped near depressed March levels, raising the odds that this stock will test and potentially break the low in coming weeks.

The Bottom Line

Bank stocks are underperforming broad benchmarks, setting off bearish divergences that could spread into other sectors during May and June.

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