What Happened To The Banks

While the S&P 500 rallied in the second half of September and into early this month, carrying the index to new highs, bank stocks have been absent from the rally. Since its 8/13 high, the S&P 500 is fractionally higher, while the KBW Bank Index, which hit a high the day after, is down over 13%. Back then, bank stocks were outperforming the S&P 500 YTD, but now they’re trailing the index by more than 10 full percentage points.

The weakness in bank stocks has been broad based. The snapshot below from our Trend Analyzer shows the six largest components of the KBW Bank Index, all of which have a weight of at least 4% in the index. Five of the six were down over the prior five trading days with the lone exception being Wells Fargo (WFC), but the stock is still down over 12% YTD, making it the worst performer of the six stocks. All six stocks are also in oversold territory, with JPMorgan Chase (JPM) trading at ‘extreme’ oversold levels (2+ standard deviations below 50-DMA).

One-year charts of all six stocks show how broad the declines have been, as they’re all down sharply from their 52-week highs and have largely been in free-fall for the last month.

Bank stocks are often referred to as the motor oil of the economy, as credit is what keeps the economy going. When banks are lending, it greases the gears of the economy, while a slowdown in lending can cause the gears to seize up and slow down the economy. So, with bank stocks coming under pressure while stocks are hitting new highs, should investors be concerned about increased friction for the economy and market? A big tell will be in the next week, as all six are scheduled to report Q3 results. More important than their results, though, will be what management of each firm has to say about the state of the economy and the credit markets.