Morning Comment: European Banks Testing Critical Support Level

We saw a nice bounce in the stock market yesterday, but the trend on the “internals” on the market continues to be the same that it has been since the beginning of the month. In other words, “internals” continue to be strong on down-days and weak on up-days. For instance, the breadth on the S&P 500 was just 2 to 1 positive yesterday...which is mediocre at best for a day that the index rallied over 1%. It was actually negative for the Nasdaq Composite...on a day when that index rallied 1.7%! That is not good at all........On top of this, the composite volume barely made it above 3bn there is no question that the volume continues to be much stronger on the days when the stock market declines than it is when the market rallies.

It seems like there is a new issue to throw into the mix each week...and this week’s “new issue” that is getting the most attention this week surrounds the Supreme Court. However, another “new issue” is the report that several of the most powerful global banks have allowed some suspicious transactions that allowed these banks to profit from powerful and suspicious players for two decades. This news hit the tape over the weekend and the bank stocks around the globe have been hit hard over the past two trading days. This has taken the domestic bank ETF below a first support level...and down close to another one. More importantly, it has taken the European bank index down do a CRITICAL support level. Therefore, any further downside follow-through will be VERY negative for the European banks.

Let’s start with the domestic banks...and the KBE bank ETF. This week’s news has taken it below the bottom line of a “symmetrical triangle” pattern. It has also taken the KBE down near its July lows of 28.42. If it breaks below that level...thus following up the break below its triangle pattern with a key “lower-low” will confirm a change in the upward trend the group has been in since March......Even though the banks have continued to underperform during the spring/summer rally, they had still been inside an upward sloping trend! It’s one thing for the broad market to rally when the banks are lagging. However, when the banks are actually FALLING, it makes it very tough for the broad market to continue to rally!

As for the European banks, the STOXX Europe 600 Banks Index has fallen over 4% this week...and is now testing its 2020 lows of $80. That level held in March, April, AND if it breaks below that level in any meaningful way over the coming days and weeks, it’s going to be very, very bearish for the group on a technical basis. This, in turn, would not be good for the broad European stock market either.

The STOXX Europe 600 index was not been able to break above its June highs in any significant way this summer. It tested those highs in both July and August, but unlike the U.S. stock market (which rallied a full 10% above June highs at the very beginning of the month), it never broke above those June highs. Instead, the STOXX 600 has been stuck in a sideways range since June. Therefore, if any break-down in the banks causes the broad European market to break below this sideways range, it would signal that its upward trend since March has reversed itself. (Given that Europe is now facing another wave of the pandemic, this is not a good time for the banks to be breaking down.)

As always, we cannot get ahead of ourselves. These global bank indexes have not broken below their more important support levels yet. However, if (repeat, IF) they do indeed break those levels to the downside, it’s something that could/should provide more headwinds to the ones the stock markets in the U.S. and Europe have already been facing this month.

Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Sep 23, 2020 — 8:09 AM
Comments ({[comments.length]})
Sort By:
Loading Comments
No comments. Break the ice and be the first!
Error loading comments Click here to retry
No comments found matching this filter
Want to add a comment? Take me to the new comment box!