Big Bank Stocks Look Scary on the Charts
As investors push long-term yields lower, banks suffer, and technical indicators suggest more pain.
By Michael Kahn
Banks do not like flat yield curves. But if the current trend continues, they are going to get one.
The spread between 10-year Treasury rate and the two-year rate continues to narrow.
In the traditional model, a bank borrows money at short-term rates and lends it out at long-term rates. When there is little differential between the two, there is not much profit potential.
And charts of bank stocks bear that out.
For example, the widely followed SPDR S&P Bank exchange-traded fund recently dropped below the rising trendline that had guided it higher since February (see Chart 1).
Compare that with the Standard & Poor’s 500, which not only remains in a rising trend since February but is still, despite a bad few days, within striking distance of all-time highs. Indeed, while the index has regained all it lost at the end of last year, the banking sector has only regained about two-thirds of its loss.
Long-term charts using weekly close data show an even scarier picture. A double top pattern formed by twin highs last year was broken to the downside and the 2016 rally has successfully tested that move (see Chart 2).
Banks of all sizes seem to be in the same boat. Some, such as SunTrust managed to regain a higher percentage of their late 2015 losses and exhibit relative strength. That means they could lead the way if the sector gets the bullish news it wants.
Some of the big banks in Europe, including Deutsche Bank ( DB ), are already trading below their financial crisis lows. That shouldn’t come as a surprise given that the yield on the benchmark 10-year government bond (Bund) went negative this week. Clearly that is a difficult environment for lenders.
For now, we first have to see how the market digests its initial reactions to the Federal Reserve’s decision Wednesday to leave interest rates unchanged. Right now investors are worried about a Brexit, and that means that if U.K. residents vote to remain in the EU next week, then a relief rally – and a big one – is always a possibility. As I wrote here Monday, however, the bond market, specifically the spread between short- and long-term interest rates, is a more important problem for the sector.