Financial Institutions' Technical Analysis
The rhetoric today pertains to sub-prime, alt-A and other potentially bad mortgage debt. Fundamentally these topics provide the foundation for a large wall of legitimate worry. What were the main drivers of the current bull market in US stocks? To be sure, the development of emergency markets’ economies played an important roll for industrial companies in the US. But as we look at the US market, what industries have stood out as the real stars during the time of the last bull run? If it was technology in the late 1990’s, the stars of this US bull market have been financials, US consumer products and services related companies. However, now the US consumer seems to be spent. If this is not apparent, you may reference recent disappointing results from the likes of Wal-Mart, J.C. Penney, Costco, Brunswick, and Sears to name a few. Also reference results from the homebuilders which were just horrible.
If you think that Fed action is going to cause anything beyond a relatively short knee-jerk rally, think again. As you will see tonight the charts of financial companies are saying that something pretty ugly is developing in the US economy. As of this day, Fed easing of short term rates are pretty much discounted in the action of the stock market and this news cannot get any better. It is therefore timely to examine the technical charts of financial companies now – when the news cannot get any better.
The charts below focus on the last few years and emphasize the 10 and 40 week moving averages as well as a weekly momentum indicator, the 14 week RSI indicator. These are intermediate term indicators designed to establish trends which occur over a period of several weeks to months. They tend to filter out the shorter term action which sometimes provides excitement, but doesn’t clearly delineate longer term trends.
Of all the large financial stocks considered in this article, American Express is the technically strongest as evidenced by the upward trending 40 week moving average and continuously supported momentum. This is the only stock considered where the 10-week moving average is still above the longer term 40-week moving average, and there is little if any evidence to suggest financial companies are in trouble based on the action of AXP.
Bank of America
Bank of America’s long term chart features a recent mulit-year oversold condition, as indicated by the 14-week RSI. Although the stock has been trending downward this year, the correction appears to be relatively mild so far. This is perhaps the 2nd technically strongest of the large financial stocks considered tonight.
Citigroup, Inc. is in a more precarious technical position than American Express or Bank of America. Notice how the 10-week moving average formed a double top and crashed the 40-week moving average at an angle of almost 90 degrees. The stock made a top while its momentum diverged. While the market rallied over the last 3 weeks, Citigroup easily and quickly gave up most of the recent gains. Unless the stock can get back above 49, it is a broken stock and a candidate for bearish positions.
Goldman Sachs, Inc.
Goldman Sachs has failed to rally significantly in the face of a general market rally. If the Fed can’t move this stock higher, what can? Note the multi-year oversold condition, and diverging price-momentum action.
Similarly, if banker-Fed talk can’t help this bank, then what can?
Of the institutions considered, Lehman is probably the technically weakest. This stock is in a long term downtrend. The price action is clearly a tall head and shoulders pattern with a failed rally back to the neckline. There is still a lot of “down” left in Lehman. (I’m wrong if it closes at 61 or above.)
Similar to many of the other stocks considered, a sharp market rally has done little to save Merrill Lynch, which has produced only a weak rally.
The regional bank ETF appears to be in a new downtrend. It rallied from 140 to over 150 before an apparent failure near the neckline (about 151) that was former support and now is likely to be resistance.
Finally, there is Wachovia, where 50 is an important technical support/resistance area. A strong rally took Wachovia back near 50, but this was on diminishing volume. The 10 week has not diverged so far below the 40 week moving average since the last bear market.
Today’s market contributed to the recent market rally on diminishing volume as all indices were up, although there was little conviction behind the rally. The action tomorrow will be more important than today with the government putting out economic data. An important aspect of the market and economy is the behavior of the US consumer. The conventional wisdom over the last few years has been that the “high end” consumer is immune from the difficulties in the real estate and mortgage markets since the high end is doing so well. This reasoning has been used by many on Wall Street to sell high end retail stocks to the public.
It is for this reason that the chart of high end retailer, Saks, Inc., is relevant. The stock appears to have finally topped at about 22.5 after having bottomed at about 3 in October of 2002. It now sits approximately 30% off of its springtime high. All is not well with the high end consumer.
Is it time to take bearish positions against the high end consumer stocks? You can afford to stay patient. There is still a lot of hope to be wrung out of these names. Consider the short term chart of Saks. Here we have a bullish hammer (-like pattern) from yesterday and it appears that the stock can easily rally toward 18 and change where it would run into resistance, which was former support near its still upward trending 40 week moving average. There was good news today in a market that doesn’t fully discount the present.
Is there more evidence of a weakening high end US consumer? Note the long term chart of Nordstrom. Again it appears to be in a similar technical predicament as Saks. It is running out of gas, but there is still a lot of hope behind the stock. Today’s results provided hope for Nordstrom and a likely short term burst (especially if supported by government data) but the intermediate term trend suggests that bullish short term action is likely nothing to get too excited about.
Meanwhile, the low end consumer stocks are weakening in spite of rosy information about today as can be seen in the chart of Sears.
The shorter term technical prognosis for Sears may not be as strong as it is for Saks. The short term action depicts Sears falling with increasing volume and rising with decreasing volume. Probably not good.
Have a great evening.
Copyright © 2007 All rights reserved.
Copyright © James J. Puplava Financial Sense® is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939