One indicator for the sector is the KBW Bank Index, which tracks 24 of the US’s leading banks. It’s run by Keefe, Bruyette & Woods, an investment bank founded in 1962 that follows more than 200 banks on a daily basis. They’re well-known as banking industry experts.
The chart below shows the index (blue line) for the year-to-date. You can see that it enjoyed a strong 135% rally from 6 March to its 8 May high (circled). But since then, the sector has fallen by 17%. And it still hasn’t managed to break through a key level of resistance - its 200-day moving average (DMA; green line).
Financials are showing us warning signs...
Source: Yahoo Finance
Over the past week, we’ve seen a continuing correction in financials. Only last week, credit ratings agency S&P downgraded 18 U.S. banks. Five of these were put into ‘junk’ territory - the lowest end of the debt ratings scale and considered speculative versus good quality "investment grade" debt.
The new rules to govern Wall Street will further tighten regulation - expect to see some of the largest overhauls to market rules since the 1930s. Proposals include plans for the Fed to oversee large financial institutions and policies for previously unregulated markets.
Look at this as a warning sign for investing in financials which have likely already priced in any positive news for the sector. And the expectation of general market weakness and tougher financial regulation means we see the banks on a continuing downtrend.
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