Bank Index: Don’t Ignore The Fact That Financial Stocks Are Tanking (XLF, FAS, FAZ, C, BAC, GS)
Mike Larson: The KBW Bank Index includes 24 of the nation’s largest banks — “Too Big to Fail” institutions such as Citigroup (NYSE:C), Bank of America (NYSE:BAC), and JPMorgan Chase (NYSE:JPM) … “superregionals” like U.S. Bancorp (NYSE:USB) and PNC Financial Services (NYSE:PNC) … and custody and trust banks, including Bank of New York Mellon (NYSE:BK) and State Street Corp (NYSE:STT).
In other words, it covers a broad swath of the financial world. And it’s been trading like death! From its high of 55.88 in February, it cratered to 45.11 on Tuesday — a decline of 19 percent in just five months.
Individual banks have done even worse.
Bank of America just plunged to its lowest level in 26 months after reporting a whopping $9.1 billion loss for the second quarter, for instance. Meanwhile, Goldman Sachs (NYSE:GS) slumped to a level unseen since April 2009 after it reported a 38 percent collapse in profit and an $800 million shortfall in revenue versus expectations.
Why am I so focused on this market action? Why should you care? Let me explain …
Banks Are a Canary In the Market Coal Mine!
I like Apple’s (NASDAQ:AAPL) products, and own an iPhone myself. I have a LinkedIn (NYSE:LNKD) profile, and I run Google (NASDAQ:GOOG) searches all the time. But does the strong performance of these specific stocks tell me a lot about the health of the broad economy? I don’t believe so.
Banks, on the other hand, are at the heart of virtually every transaction on the planet. They process our credit card payments, fund our mortgages, finance our car purchases, and put up the capital for businesses to build warehouses and factories. They execute our stock trades, manage our money, and facilitate virtually every equity or bond sale for corporate America.
In short, bank earnings tell us a lot about the health of the underlying consumer and corporate sectors. And bank stocks can provide an important signal about where the broad market is heading.
Just look at what happened in Phase I of the credit crisis. The BKX topped out in February 2007, as you can see in this chart below.
But the broader Dow Jones Industrial Average rallied for a few more months before topping out in October.
Ultimately, the BKX shed a stunning 85 percent of its value. The Dow lost more than 54 percent, or almost 8,000 points! Or in simple terms, anyone who ignored the message of the BKX paid a very stiff price.
And despite a slight bounce in bank stocks this week, clearly the trend is lower.
My Prescription: Caution!
This week, we saw a lot of euphoria over the prospects for a debt ceiling deal. Earnings from the likes of IBM and Apple only added to the positive vibe. But again, if you listen to what key financial companies are saying, you hear a much more worrisome outlook.
So my prescription remains the same: Exercise extreme caution in this market! Take profits off the table if you have them, lower your risk exposure, and consider inverse ETFs to protect you from adverse moves in stocks, riskier bonds, and overvalued currencies.
There’s a message coming from the markets. Are you listening?
Related Tickers: Financial Select Sector SPDR ETF (NYSE:XLF), ProShares Ultra Financials (NYSE:UYG), Direxion Daily Financial Bull 3X Shares (NYSE:FAS), Direxion Daily Financial Bear 3X Shares (NYSE:FAZ), ProShares UltraShort Financials (NYSE:SKF).
Until next time,
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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