Who pays the bill?
A client told me a funny one-liner recently: “Witnessing the Republicans and the Democrats bicker over the U.S. debt is like watching two drunks argue over a bar bill on the Titanic”. I guess that the same could be said about the European situation.
Jokes aside, I have been asked if my prognosis for a short termed rally into the winter might be a bit off-side, given the global financial crises. Anyone who follows this blog regularly, or reads my various columns or media appearances will know that I am reasonably short termed bullish (target S&P 1300 +/- by early winter) but longer termed bearish. People are asking me if a short termed rally can in fact still occur in light of the changing economic environment. My answer to that question is this: markets can rally in the near term because the leaders of the European Union (and the U.S. representatives) have no choice but to quickly come up with a debt “remedy”. I use the word “remedy” with some trepidation, given the inevitable longer termed slowdown that will likely follow global deleveraging. The markets propensity to react to news will likely push a strong rally upon any announcement perceived to be positive. Perhaps Wednesdays announcement of central bank cooperation was that catalyst. One cannot argue with the follow through movements by world stock markets after Wednesday’s announcement, but we will need a rally through the resistance level of 1260 (which also contains the 200 day MA) before I would expect the move into 1300 or higher to materialize.
Anyone who follows seasonal investing patterns will be aware that the banking sector comes into “season” shortly. With this in mind, I will cover the banking sector from a technical perspective and offer some insight into the risks and rewards at this point of time.
Below is a two year chart of the BMO Equal weight bank index—an all-Canadian bank ETF. From a chartists point of view, I find this chart one of the better ones for identifying well defined and predictable patterns. To provide you with a brief “tour” of the chart, I’ve marked a few of these pattern formations. Back in early 2010, the sector went through a rectangular consolidation pattern. It broke the upper resistance line of that rectangle only to consolidate yet again in a right-angled triangle in late 2010. The first half of this year saw a “Phase 3” pattern that some might refer to as a “Head & Shoulders” top. A classic neckline test in early July was followed by a “Phase 4” downtrend—as marked by the descending trendline. Please refer to my book Sideways for more information on identifying market phases. Recently, the banks have been caught in an expanding pattern—although not of the classic definition. Expanding patterns are bearish patterns typically seen in a Phase 3 market top. These patterns typically show a series of higher (expanding) peaks while at the same time displaying lower (expanding) lows. The current pattern for banks is for expanding lows only. This is atypical, but nonetheless implies caution. Note the flat resistance line or “ceiling” I’ve drawn on the chart.
My take on the banking sector is to look for a pause as it is currently hitting the downtrend line I’ve drawn on the chart ($16-ish for ZEO). A break through the trendline would be bullish, and would target the “ceiling” of around $16.75 noted above. Positive technical factors include momentum indicators such as MACD and RSI beginning to “hook up” from an oversold condition. Seasonal influences are usually positive as the banks begin to report earnings in the coming days. However, after a brief but significant rally in this sector to the resistance levels noted above, I would become much more cautious about the outlook for the banks.
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