Philly Bank Index Not Supporting This Rally

Includes: KBE, RKH
by: Alligator Investor

There is an old saying that no market rally can be sustained for long without the support of the financial sector, especially banking stocks. The Philadelphia Bank Index has been doing poorly compared to the S&P 500 for several months. This relative strength chart shows that relationship for the last year.

According to classical technical analysis principles, a double top formed during June and August. The neckline of that double top has been decisively penetrated. If the ensuing downward movement equals the height of the double top, this ratio could decline all the way to the .0774 area seen last October.

I think this is a bad omen for the stock market in general and for banking stocks in particular.

The bank stocks I have been looking at appear to be overvalued 15 to 20%. Meanwhile they are facing serious obstacles: not only the well-known threats to making money in the banking business, like a slowing economy, a falling housing market, and an inverted yield curve, but also new threats, like peer-to-peer lending on the internet. This phenomenon is growing rapidly and has the potential to seriously disrupt traditional banking if internet giants like Google or Yahoo get involved.

I would not be surprised to see a sharp correction in the banking sector and a general market correction of 7 to 10% by the end of the year.