The other week I was eyeing a possible breakout for the S&P 500 this month if it were able to close above its highs of February and April. The stock market hasn’t done that yet and it is just as possible now that it will go through its lows of the month and closest support point at its 50-day moving average. If it does that I’d look for a test of the area of its 150 and 200-day moving averages, which is right above the 1/3 retracement point of the October low and recent high around 3950. You’d basically be looking at a real support zone of 3950-3980 for the S&P 500.
One thing that made me think that a breakout potential was real earlier this month is that when I looked through about a thousand individual stocks many had potential breakout consolidation patterns. I had about a dozen I was watching closely and so far a few of them actually crashed on earnings, while three did manage to breakout, while most of the rest have dipped.
It is difficult to really predict what the S&P 500 will do here. Big cap tech is helping it for now, but many stocks are drooping.
Bank stocks in particular made a new low last week, as you can see from the IAT ETF.
This is concerning.
Tightening credit conditions will at some point cause the economy to slow down if it hasn’t begun to do so already.
A problem is that the decline in banks stocks is directly tied into the secular bear market in bonds that started after interest rates went to zero in 2020, so there is no reason to think the trend has ended for good.
In fact, it is more likely that bank stocks will continue to decline and at some point the stock market will roll over too and follow them down.
This is exactly what happened, for instance, in 2007.
Take a look at this chart.
Bank stocks peaked in February 2007 and fell apart that September, while the SPX didn’t really roll over into a new bear market until that October. Mortgage stocks and other specialized finance companies peaked in February and fell worse than the regional bank stocks did.
The point is weakness in bank stocks now is probably a harbinger of the S&P 500 rolling over at some point, but I don’t know when. That could be happening soon or months from now.
One other thing to watch for as a warning sign are corporate bonds.
Rate hikes are pretty much done and bonds go up when yields go down, but if corporate bonds start to drop anyway that would be a sign of tightening credit conditions and actual growing worries about corporate debt. Corporate bonds peaked in 2021 months before the stock market did.
So, I’d be wary if LQD does break recent support.
BTW – at some point I believe that regional banks will be a buy. There are people out there saying buy them now, but I believe the time to buy is after the next big decline in the stock market and there is a panic bottom. Banks stocks were not a buy after they peaked in 2007 until March of 2009. IAT actually crashed again going into that final bottom.
I am not saying we are headed for a banking crisis like what happened in 2008, but more that we are actually seeing what happened in the 1970’s play out with banks. Back then bank stocks were the worst performing sector of the market that entire decade. They led the whole market down during the 1973-1974 bear market and we are currently in a big stock market rally or cyclical bull market that will end at some point and lead to another bear drop.
What hurt bank stocks then is what is hurting them now – a cycle of inflation linked to a bear market in bond, which caused bank balance sheets to decline in value. Banks actually made more money, as a whole, during that bear market, because they were charging higher interest, but the decline in their net asset value hammered the stocks down. That is essentially what has started with all regional bank stocks, with some very vulnerable ones blowing up or on the path to doing so.
It can be very difficult to find historical data for what various sectors of the market did in the 1970’s.
If you flip to page 5 of this paper by the Federal Reserve you can see what they did during that bear market.
There was nothing like the 2008 bank crisis going on during that 1970’s bank stock crash.
It was simply the impact of a new big secular inflationary cycle that smashed them.
Same now.
At some point there will be another big decline in the stock market.
Whether that actually starts this year or next year, eventually it should lead to a real panic bottom in the market and that could be the time to buy bank stocks – NOT NOW.
How would you know which ones are safe to buy?
All you have to do is look for ones that are holding up while the bank stock sector as a whole is crashing towards its final bottom.
For instance look at what AMNB did in 2009.
I have no idea if it will be a good one to buy again.
It is just how this example provides a lesson.
Notice how the relative strength AMNB/SPX ratio surged into that March stock market bottom.
The best way to find what sectors or stocks to buy into are to find the ones with rising relative strength during a panic sell-off in the stock market, particularly at the end of a bear market.
Right now, with this market rally having now started eight months ago one is so late into it that trading it is like flipping coins.
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-Mike
