At any given juncture in the stock market, there are a number of conditions that folks can point to as potential warning signs for the market. Certainly those with bearish inclinations will seize upon such conditions to explain (or promote) their view. One such warning currently being trumpeted relates to the recent under-performance of banks and financial stocks. Even bulls would have to acknowledge the reality of this under-performance, which, in fact, recently reached an ignominious milestone.
Specifically, while the S&P 500 scored a new all-time high on Friday, the KBW Bank Index (BKX) closed more than 10% away from its 52-week high. According to our research, it was just the 9th such (unique) divergence since the inception of the BKX in 1992.
So, there is little doubt that financial stocks are indeed lagging the market at the moment. However, is it clear that this is condition is truly a red flag for this bull market?
We can see from the chart that a few of the historical occurrences (e.g., 1999-2000, 2011) took place in close proximity to market tops of some magnitude. We know that the outstanding market research firm, Ned Davis Research, claims that financials are notoriously one of the weakest sectors leading up to significant market tops.
However, we would also argue that far too seldom do folks actually crunch the historical data to determine whether or not various conditions actually warrant the “warning label” (assuming historical patterns have any implications for present or future market behavior.) Thus, while bulls would certainly prefer to see financial stocks hitting new highs along with the major averages, we would caution against assuming this divergence is an automatic death knell for the rally – at least without doing the necessary research.
In a premium post at The Lyons Share, we undertake such research, looking at the historically similar divergences and conditions surrounding them in an effort to discern a realistic level of warning that one should assume here.
The SPDR S&P Bank ETF (NYSE:KBE) was trading at $41.11 per share on Tuesday morning, down $0.28 (-0.68%). Year-to-date, KBE has declined -5.43%, versus a 9.01% rise in the benchmark S&P 500 index during the same period.
If you want this “all-access” version of our charts and research, we invite you to check out our new service, The Lyons Share.
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.
This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.