Beyond Wells Fargo: Are Banks Headed for a Fall?
Bad price action on good news – as we’ve seen with JPMorgan, Citigroup, and others – is a bearish sign.
By Michael Kahn
Peer Citigroup in Your Value Your Change Short position (C) also reported lower earnings and beat expectations anyway, and its stock did nearly the exact same jump at the open and drop into the close. Bad action on good news.
On Monday, Bank of America (BAC) jumped about 1% at the open following similar news. The stock peaked immediately and soon after was trading in the red.
Amateur hour, for sure, but it was another time a major bank failed to break through resistance. Technical indicators confirm this weakness, too.
Rounding out the top four giants by market value, embattled Wells Fargo (WFC), reeling from its sales-tactics scandal, still managed to beat its earnings and revenue estimates for the third quarter. While not as dramatic on the charts, the stock opened strong last Friday before closing slightly in the red.
This stock has a different look from its peers, thanks to the scandal. Technically, it broke down below support last month and rallied back to touch that level last week (see Chart 2). This is called a “test” of the breakdown, and it gives bears one more chance to sell at better prices. The bears obliged, leaving this stock with a weak outlook, albeit for different reasons than its peers.
Many regional-bank stocks echoed this pattern. North Carolina-based BB&T BT in Your Value Your Change Short position Corp (BBT), for example, broke out to the upside on Oct. 5, edged still higher, and then abruptly reversed course on Oct. 11. On Oct. 13, it fell sharply, leaving a gap on the charts, and then closed back below its previous breakout level (see Chart 3).
Capital One FinancialCOF in Your Value Your Change Short position (COF) and PNC Financial Services GroupPNC in Your Value Your Change Short position (PNC) are but a few other large banks with regional offerings with a similar pattern in force.
At best, it looks like the entire banking sector threatens to end its brief period of market leadership, and, at worst, looks ready to lead the market to the downside. Whether this shift is a tell on future Fed policy is debatable, but for investors, the risk/reward ratio with these stocks is no longer favorable.
When it comes to big banks, something sinister is lurking beneath the surface. Several saw their shares jump up on good earnings news. only to give back most if not all of their gains by the close of trading the same day.
In technical analysis, bad trading action on good news is bearish – as is the simple failure of an upside breakout to hold, as we’ve seen with many regional banks. Combined, these two trends do not bode well for the sector.
There is a reason the first half hour of stock-market trading is called “amateur hour.” Typically, it is when less sophisticated investors, whether individuals or professionals, act on the hot news of the day. It is also when orders placed overnight all hit the market at once, which can cause spikes higher or lower.
Sophisticated traders let the initial frenzy subside and often trade in the opposite direction from the initial move. A case in point: last Friday’s action in JPMorgan Chase (ticker: JPM). The company reported lower third-quarter profits, but both earnings and revenue beat Wall Street’s expectations.
The stock opened the trading session 1.6% higher, but quickly started to head lower, finishing in the red for the day (see Chart 1). The doubters were right not to chase the initial jump higher.