Daily State Of The Markets: Is It Time To Worry About The Banks?

Includes: DIA, IWM, QQQ, SPY
by: David Moenning

From my perch, the question of the day really isn't really about oil, where the low in oil is, or when oil will embark on a real bounce. While it is quite clear that the correlation trade between stocks and crude is locked in the "on" position at this point in time, the bigger concern - again from my point of view - is the recent action in the banks.

From a big-picture point of view, this issue goes to the question of whether we are seeing a garden variety corrective phase, which can be triggered by any ol' thing at any time, or another really nasty encounter with the bears. You see, the devastation that occurred in the 2008 "Credit Crisis" really wasn't about mortgages or real estate. No, it was the state of the banking system that was the real problem.

I've been writing about this, speaking about this, and recording videos about this for some time now. One of the key points I've been making is that big, bad bear markets aren't likely to occur unless the banks are at risk. And while I am by no means an expert in the banking sector, I can spot a chart that is in trouble with the best of 'em.

So, instead of me rambling on this morning, I thought we would run through some charts - to see if we all come to the same conclusion at the end.

A Picture Is Worth 1,000 Words

If one looks at a daily chart of the BKX (the KBW Bank Index), it is clear that the banks have been having a rough go since the beginning of December.

KBW Bank Index - Daily

And then if we compare the chart of the BKX to the S&P 500, I would say that while the banks (A) are definitely not in great shape, (B) have poor relative strength to the SPX, and (C) are in a downtrend, the comparison of the two charts doesn't get me overly worked up.

S&P 500 - Daily

However, sometimes you need to step back from the day-to-day madness to get the bigger picture. And I must admit that with the market having become so "noisy" due to all the high speed shenanigans that occur on a daily basis, I find myself looking at weekly charts more and more.

So, next let's compare the S&P 500 to the banks on a weekly basis.

S&P 500 - Weekly

To be sure, chart analysis is oftentimes more art than science. And I'm confident I'll have folks take exception with my view on the weekly chart of the S&P. But in my opinion, while the S&P is definitely in some sort of a downtrend on a weekly basis, the chart hasn't "broken down." (And yes, I will admit that the word "yet" could easily be inserted at the end of that last sentence.)

But now let's take a look at the BKX on a weekly basis and I think my point will become quite clear...

KBW Bank Index - Weekly

The bottom line is the recent price action in the BKX represents a very clear and very important break of support - and also represents a gaping divergence from the overall market. And this, my dear readers, could be a problem.

As banking expert Dick Bove said yesterday, the current move could be an overreaction in the prices of U.S. banks. Mr. Bove talked about the cash on the balance sheets of the big banks not matching up to the pricing being currently applied to the sector.

But unless the situation on the chart reverses in short, order, for me, the big question becomes, what do the banks know that we don't? And like 2008, is there something lurking on the balance sheets of the banks that we aren't aware of?

Another question that pops into my mind is if this an example of the "derivative" aspect of oil's decline? After all, going from $100 to $30 is bound to create some spillover/contagion problems along the way.

For example, analysts contend that the U.S. banks are on sound footing at the present time. Everybody knows about the collective exposure to the oil patch, junk, etc. And nobody seems terribly concerned - well at least not until now.

But here's a thought... Could this be about the banks in Europe, which, from what I've read, have not healed to any great degree since the European crisis ended? Is there outsized exposure in the U.S. banks to problem areas across the pond?

Don't forget that Greece has been the gift that keeps on giving to the bears for years now and the balance sheets of many European banks are not in great shape (to put it kindly). For me anyway, this is something to noodle on.

And just to be clear, I don't have answers to these questions. However, the divergent action in the banks has definitely caught my eye. So while I don't want to be an alarmist and I am a card-carrying member of the glass-is-at-least-half-full club, I, for one, will be watching the action of the banks very closely in the coming days/weeks and suggest that everyone do the same.

As I've mentioned, the banks are always the key to a crisis. And here's hoping that this does not turn into one.

Turning to This Morning

After selling off more than 5% on each of the past two sessions, oil futures are moving higher this morning on word that Russia is willing to talk with OPEC. However, the supply data from API that was released after the close yesterday showed that inventories continued to rise, which, of course is bearish. So, investors can be forgiven if they view the early move in oil with a skeptical eye. In the overnight markets, Asia saw declines (despite talk of endless QE in Japan) while European bourses are in the red today. However, U.S. futures are apparently focused on oil and point to a modestly higher open on Wall Street.

Today's Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

Major Foreign Markets:

Japan: -3.15%

Hong Kong: -2.34%

Shanghai: -0.38%

London: -0.54%

Germany: -0.95%

France: -0.35%

Italy: -1.51%

Spain: -1.74%

Crude Oil Futures: +$0.42 to $30.30

Gold: +$3.20 at $1130.40

Dollar: higher against the yen and euro, lower vs. pound

10-Year Bond Yield: Currently trading at 1.879%

Stock Indices in U.S. (relative to fair value):

S&P 500: +4.20

Dow Jones Industrial Average: +35

NASDAQ Composite: +7.20

Thought For The Day:

The world is but a canvas to the imagination. -Henry David Thoreau

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

1. The State of the Oil Crisis

2. The State of Global Central Bank Policy

3. The State of China's Renminbi

4. The State of the Stock Market Valuations

The State of the Trend

We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 6 months, and long-term as 6 months or more. Below are our current ratings of the three primary trends:

Short-Term Trend: Moderately Positive

(Chart below is S&P 500 daily over past 1 month)

Intermediate-Term Trend: Negative

(Chart below is S&P 500 daily over past 6 months)

Long-Term Trend: Neutral

(Chart below is S&P 500 daily over past 2 years)

Key Technical Areas:

Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:

  • Key Near-Term Support Zone(s) for S&P 500: 1905
  • Key Near-Term Resistance Zone(s): 1950-1980

The State of the Tape

Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...

  • Trend and Breadth Confirmation Indicator (Short-Term): Neutral
  • Price Thrust Indicator: Negative
  • Volume Thrust Indicator(NASDAQ): Negative
  • Breadth Thrust Indicator (NASDAQ): Neutral
  • Short-Term Volume Relationship: Neutral
  • Technical Health of 100+ Industry Groups: Negative

The Early Warning Indicators

Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.

  • S&P 500 Overbought/Oversold Conditions:

    - Short-Term: Moderately Overbought

    - Intermediate-Term: Oversold

  • Market Sentiment: Our primary sentiment model is Neutral

The State of the Market Environment

One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward.

  • Weekly Market Environment Model Reading: Negative