Major banking funds have broken key support levels and dropped to 2018 lows, overwhelmed by eight Federal Reserve rate hikes and the most recent market swoon. This price action sets the stage for critical testing at 2016 breakout levels, which mark the nexus between long-term bull and bear markets. That testing is likely to continue well into 2019 while investors await the economic fallout from rising bond yields and trade wars.
Commercial and regional banks have lost ground at an equal pace in recent weeks, highlighting the broad nature of selling pressure that accelerated at the end of September. The flood of sector earnings reports is now under way, but recent results by the biggest players have failed to staunch the exodus of capital, making it less likely that mid- and small-tier operators can turn the downward tide.
JPMorgan Chase & Co. (JPM) continues to lead the group but has already failed two attempts to break January resistance near $120. Meanwhile, Bank of America Corporation (BAC) is struggling to hold the mid-summer low at $27.74, while Citigroup Inc. (C) ended a refreshing period of leadership behavior at the start of 2018 and is now trading nearly 14% below the January high. This bearish action by the industry’s generals doesn’t bode well for smaller banks in the coming weeks.
The SPDR S&P Bank ETF (KBE) sold off from $60 to $8.90 during last decade’s economic collapse and recovered in three rally wave that crossed the .786 Fibonacci sell-off retracement level near $50 in January 2018. The fund topped out at $52 in March and turned tail, crisscrossing the harmonic level into September and then accelerating to the downside, breaking support at a 10-month descending triangle topping pattern.
The September 2017 low at $39.60 marks the only support level above the November 2016 breakout, which still features an unfilled breakaway gap between $35 and $35.35. Theoretically, that’s as low as the downside can carry without declaring the end of the multi-year bull market. However, a bounce at that level would mark a pyrrhic victory because it was first reached in 2014, translating into zero upside for more than four years.
The SPDR S&P Regional Bank ETF (KRE) sold off from $51 to $14.42 during the bear market and also bounced in three broad rally waves. It mounted 2007 resistance following the presidential election, unlike its commercial rival, exhibiting impressive relative strength. This divergence made sense because regionals escaped the majority of Dodd-Frank headwinds, booking revenues through traditional operations that include mortgages and commercial loans.
The September 2017 low at $49.31 also marks breakout support at the 2007 high, forecasting a potent sell signal if broken. The pattern also shows a November 2016 unfilled gap between $44.30 and $44.70, marking the logical downside target if selling pressure stretches below $50. The fund first traded into the mid-$40s in 2015, once again highlighting the potential for a multi-year zero return.
Both banking funds will face stiff resistance at their 200-day exponential moving averages (EMAs) if a recovery effort gathers steam in the coming weeks. These levels translate into $48 on the commercial fund and $61 on the regional fund. Rallies above those barriers will be required to ease technical damage and improve the long-term outlook, but that’s unlikely to happen without a major bond market reversal.
The Bottom Line
Commercial and regional banks have broken their 200-day EMAs and sold off to 2018 lows, despite a roaring U.S. economy. Rising yields and trade wars are to blame, suggesting lower prices well into 2019.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>