I’m humming Ozzy Ozbourne’s song “Crazy Train” as I write this blog.
Talk about a parabolic move. The US banks—small and large—launched aggressively after the election. The index has risen from 225 to 280 in about 20 days. That’s 24% in 20 days.
Needless to say, we have overbought momentum indicators, and a vertical series of white candles with little or no wicks – especially in the days immediately following the election. This type of movement is unsustainable. I expect a pullback in the sector sooner rather than later.
Note on the weekly chart the breakout point at around 255 for the index. Often, when a market pulls back from an overbought situation, you will see a pullback that can come fairly close to that breakout point. That might imply up to 15% or so neartermed downside.
Equityclock’s seasonal chart suggests a pullback in January for the sector – with an average retracement of about 3%. That’s under normal conditions. Given the parabolic move we’ve seen on the banks, I feel that we’ll see much more than 3% drawdown on the sector before it gets back on the seasonal trend for strength into March and April. I like the sector, and the breakout is bullish, but it’s gone too far to fast.
Sure, you could see a little more upside yet – but this runaway train may soon run short on gas. New money may want to hold off until January if/as/when it stops to refuel.
based on your analysis would you consider buying an inverse ETF on US financials?
I searched for one and the only unlevered version I came up with was Proshares SEF. It seems to buy swaps so I sense more risk then an ETF selling specific shares. I looked at it’s performance ~Nov 4th till Dec 7th and it has lost “only” ~13%. This differs dramatically from $BIX ~24% gain. So I conclude SEF is not fairly representative of $BIX and hence would not see as significant a gain should banks correct as you predict.
Q1- is there a representaive inverse ETF you know of?
Q2- any idea why SEF does not align with $BIX? Perhaps it is because SEF is all financials and not just banks?
Q3- do you have a conviction to inverse the US banks?
I wouldn’t short or inverse the banks despite the obviously overbought conditions- but that’s just me. Patterns are for renewed strength into the spring based on the seasonals–after the short seasonal downward blip noted. Further, the sector has strong relative strength–that’s the kind of thing we want to be in for a bigger picture trade. My comment is that banks could have a short termed selloff. I can’t say how deep – the comment of a retracement back to the breakout (15% max) was not a target, merely a potential.
I’d rather say that I’d hold off on buying and even consider a sell then buyback later strategy if you own them now. And yes, the banks are different than the “financials” which do include insurance companies. They – as a group- are strong – but not as parabolic.
vix is low. maybe time to tighten those stops
Yes- we expect a blip in January–so we sold our Japan ETF today (Monday Dec 12–see blog), and expect to see opportunities to buy some market leaders like the banks soon. Santa rally, then perhaps a pullback. VIX is low, and dumb money indicator is high (contrarian). A few warning signs, but that means opportunity is approaching.