Getting Technical
MONDAY, AUGUST 15, 2011
Don't Catch the Banks' Dead-Cat Bounce
By MICHAEL KAHN
While a steep drop in bank stocks makes them look tempting, technicals say investors should resist.
The talk on Wall Street this week is how attractive stocks have become, and I won't argue with valuations and other fundamental metrics. However, the technicals tell us a very different story, and banks in particular are still very weak.
In other words, low prices do not mean cheap stocks.
It is no secret that the stock market is coming off a very bad few weeks in which some sectors entered what many consider to be "bear market territory." This label is applied when the losses from recent key highs reach 20% or more. For most market sectors as well as the Standard & Poor's 500, respective key highs were notched in April.
One major exception is the SPDR KBW Bank exchange-traded fund (ticker: KBE), which peaked in February. And even with the past few days of gains, it is still down roughly 30% from that peak (see Chart).
Chart
SPDR KBW Bank ETF
It would seem that such a pullback would make banks attractive for long-term buyers based on the fundamentals, about which I won't take issue. But the trend in 2011 is down, and there is little technical evidence to say prices will not move even lower before conditions improve.
Last week, from a short-term technical perspective, the market seemed to enter a panicky phase. The number of stocks making 52-week lows soared, and the near unanimity of stocks falling on days when the market gave up big ground were indeed indicative of the public's frightened mood.
After a five-month decline into July and an August free fall with the market, banks were in position for what chartists call a "dead-cat bounce." After a 30% decline, the deadest of cats could be counted on to rebound. In more pragmatic terms, everything has a price low enough to entice bargain hunters to buy, which seems to be happening now to the banks.
But it is now, as the market is licking its wounds and trying to gain back a portion of what it lost, that sectors can show their moxie. Unfortunately, the banks have none. They underperformed the broad market in better times this year and continued to do so this month during the bad times. And making it worse, they lagged last week, too, even as there appeared to be an attempt at recovery. This implies the public is not following the bargain hunters into this sector, which means true demand has not yet returned.
But this does not mean bank stocks are going to tumble immediately. It does suggest, however, that if the market cannot pull itself out of its current woes then banks are going to be especially vulnerable.
Even last Friday, when the overall market seemed content to end the week in a stable state, banks found themselves sliding lower most of the day. This short-term weakness told us that traders did not want to hold bank stocks over the weekend. And even with the boost they enjoyed Monday, thanks to a generally better feeling in the market, the technical implications of Friday's weakness still hold true on the charts.
The question is how high this damaged sector can go on the coattails of the market's bounce. The chart shows resistance, or a place where supply may increase to swamp demand, at roughly $21.20 (the ETF traded at $19.40 mid-day Monday). This coincides with the major low of August 2010 and is also roughly a one-third retracement of the February-August decline.
The convergence of technical levels makes this an attractive target, but given the fragile state of the sector I am not so sure there is enough in its tank to make it. And even if it does, there is so much technical resistance above that it would take a good deal of effort to break through.
These stocks may look cheap, and they may be higher in a few years. But the overall technical trend is still down. I'd rather pick them up at even more attractive prices later this year.
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Michael Kahn, mutual fund co-manager, author of three books on technical analysis, former Chief Technical Analyst for BridgeNews and former director for the Market Technicians Association, also blogs at www.quicktakespro.com/blog.
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