Thursday, February 11, 2010

What's Wrong With Bank Stocks?

Since the middle of October, bank stocks have been trending down and are significantly under performing the general stock market.  Take a look at the following chart.  It compares the Dow (red), S&P 500 (yellow) and NASDAQ (green) with XLF, the Financial Sector Select SPDR (XLF).  XLF is composed of JP Morgan, Wells Fargo, Bank of America and other banking stocks:

As you can see, the divergence has developed since the middle of October, where most bank stocks peaked.  The general markets are comfortably up since that time.

Let's break down XLF by some of its major components.  Here is a comparison of JP Morgan, Citigroup, Bank of America and Wells Fargo.  Citigroup is the lone deviant, having peaked before the others back in August:

This trend is apparent in other financial stocks as well.  Here is a comparison of Goldman Sachs, Morgan Stanley, Credit Suisse and Deutsche Bank, all having peaked out in October as well:

So why is this a big deal?  Well, let's look at the last time that financial stocks started to diverge from the greater stock market.  Here is the first chart again, comparing XLF with the general market indices, but with a time frame from the middle of 2007 until the middle of 2008:

As you can see, the general market was basically flat while the financial stocks were down roughly 30%.  Of course we know what happened just a few months after this - Lehman Brothers went bust, the financial crisis went into full swing and stock markets crashed all around the world.  Are we headed for another financial collapse?  Nobody knows for sure and we do not have quite the divergence that we did back then (yet) but things look ominous.

The market technicals are flashing warning signs.  The economic fundamentals are also flashing warning signs, as the problems in Greece, Dubai, Venezuela and elsewhere continue to spread.  Perhaps contagion will develop into a full blown crisis, similar to what we experienced as collapse spread from mortgage lenders to Bear Stearns to Fannie Mae and Freddie Mac and finally to Lehman, AIG and the whole financial system.  Only time will tell.
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