Is the secular US stock performance trend coming to an end. If so it has major implications for investors. I tackle this possibility in the latest video
Will JP Morgan Lead Banking Stocks Lower?
The chart of JPM below mirrors that of the banking sector ETF, XLF. A tremendous rally off of the Trump election, enough to create a very overbought condition closing out 2016. Since that point, it attempted to rally after a small pullback and actually reached new yearly highs in March. But on that push, negative momentum was formed and the stock has been grinding lower ever since. As you can see JPM has gone nowhere (dead money) for the past 6 months and has formed a bearish head and shoulders reversal pattern. If the pattern were to play out its target is labeled T1 on the chart some 12% below todays close. T2 is a support level of significance if T1 does not stick and the market continues to sells off.
As investors in any region of the world, we always want to see banking stocks in healthy up-trends, making higher highs. While JPM’s price is still above a rising 200 day moving average, it formed a new intermediate term lower high and lower low warning of a potential trend reversal. Any play out of the bearish head and shoulders pattern would make huge dent in the bullish case for banking stocks.
As goes JPM, so goes the banking sector.
It’s important to know that head and shoulders patterns which are over-hyped up by the financial media’s lack of understanding of technical analysis and constant need for headlines. When these patterns do actually play out they are a thing of beauty and can be quite profitable for those short. But the fact is these pattern either don’t materialize or fail the majority of the time. Why? its because historically stocks have spent 70-80% of the time either moving sideways or higher and this pattern is a marker for stocks moving down. Back to JPM, from a purely mathematical standpoint we have higher statistical probabilities a decline will NOT materialize. Nevertheless whenever these patterns develop they should not be ignored as they are a warning sign and we need to be concerned just in case it turns out to be one of those 20-30% possibilities.
Are Global Stocks Poised to Run?
Almost 9 years later it appears as if global stocks are ready to break out above their 2008 highs. As you can see in the chart of ACWX below, an aggregate index of global stock markets, excluding the US, is sitting just under prior highs. This area has acted as resistance and was rejected the past 3 times it tested it from below.
It is said the more times price tests a certain level the more likely it is to break through. If the 4th time is the charm, it would add another feather in the hats of stock market bulls. While the US broke out years ago, most countries around the world have not. As such a breakout would send a strong message and confirm investors strong risk appetite.
The Wall of Worry
It is said the stock market climbs a “wall of worry”. This expression was coined in the 1950's and depicts a sustained stock market rise during a time of economic, financial or political stress in which stock prices are said to be ascending a "wall of worry". What greater stress is there than having a nuclear-armed, narcissistic nutcase as your nearest northern neighbor?
It appears as if South Korea has been able to overcome this wall as you can see in my chart of their stock market ETF proxy, EWY, below. It had been trapped in a huge 7 year, 35% sideways range, going nowhere offering buy and hold investors little to no stock market gains. But all that may have changed 3 short weeks ago.
As you can see, price gapped above long term resistance on more than a 50% increase in volume (lower pane) on the breakout which also pushed momentum (upper pane) into the bullish territory for the first time in many, many years. This is all very constructive and opens the door for additional and possibly significant future gains.
Even with the very positive outlook the charts are telling us as a backdrop, do your inner spidey-senses continue to tingle knowing you could be one bad hair day away from “a merciless sacred war” that will turn Seoul into “a sea of fire” or “reduce it to ruins with weapons of absolute justice”? If this were to happen I would guess it just might be one wall their stock market might not be able to climb. I don’t know about you but for now I am going to err on the side of caution and watch this all unfold from the sidelines in spite of the opportunities it presents.
Blockbuster or a Flop?
US bank stocks went on a tear after the Trump election. The promise of a pro-growth agenda combined with higher rates the FED was proclaiming set up an ideal environment for them to prosper and roll in the dough. Unfortunately, the promises and proclamations ran into political reality and as such that ideal environment is becoming a distant memory. As you can see in my chart of the US bank sector ETF, XLF, below, banks ripped higher, topped and are close to breaking down out of a very symmetrical and almost ideal head and shoulders (topping) pattern. A breakdown below the blue horizontal neckline and hold, points to a downside target at, T1. Since there is little support at that level, it is likely if T1 is hit, they continue lower down to the T2 zone as that is a level of major support.
On the flip side, some European banks which, many were on the precipice of default and setting up the potential for another 2008 banking-type crisis, look exactly like the US banks. Except upside down. A good example of this is represented in the chart of Deutsche Bank, DB, below. Like their US brothers, they have not broken out of their almost symmetrically ideal (inverse) head and shoulders (bottoming) pattern. A break and hold above the blue horizontal neckline points to an upside target at T1, some 40% higher. If it really has some legs and slices right through T1, the T2 zone represents a level of major resistance where it will likely struggle as supply is likely plentiful. I find this situation unique and interesting as investors are potentially setting their sights on Europe. If so, this would be a major fundamental shift.
Patterns in development are nothing but a potential setup for a future investment. Until either one of these confirms they should be viewed only as you would a trailer to an upcoming movie. Something to grab your interest but sometimes turn out to be the highlights of a studio flop.