Banks Still on Shaky Ground

 | Sep 25, 2013 | 7:00 AM EDT  | Comments
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If I had to pick the two most-asked questions in my inbox Tuesday, they would be: "Why is the Russell 2000 so strong?" and, "Have you seen the head-and-shoulders top in JPMorgan Chase (JPM)?"

Let's deal with the latter one first. Of course I see that head-and-shoulders top. My gosh, it's as if it came out of a textbook! Why else do you think I have harped about the ratio of the KBW Bank Index (BKX) to the S&P 500 since August?

JPMorgan Chase (JPM) -- Daily

As you can see above, I have drawn in the pattern on the JPMorgan chart with the left shoulder in May, the head in August and the right shoulder in September. The stock is now sitting right at the neckline ($50). Now, please glance at the box on the chart. Do you remember that head-and-shoulders pattern as well? This one is much larger, of course, and the right shoulder was literally a throwback rally to the underside of a long-term broken uptrend line -- one that's different from what we saw the spring. But I would ask that everyone take a deep breath and remember this: Unless the stock breaks the neckline, it is just a potential top, not a completed one.

It is my view that JPMorgan will eventually go lower. I believe it's just a matter of whether the stock bounces first and then breaks, or if it opts to break and then has a crummy rally.

The key for me is to watch the BKX-to-S&P ratio. When we last looked at this chart last week, I mentioned that those who had hoped for a higher low vs. July were sorely disappointed, and that they were now likely hoping for a bounce or a higher low vs. June. On the chart below, you can see that did not happen, either, as the ratio sliced through that level like a hot knife through butter.

BKX vs. S&P 500

There is small hope now, at least in the short term, that the uptrend line ought to provide for some sort of bounce. This plunge has been in almost a straight line, and it really ought to have a breather. I would be shocked if that uptrend line were to break on the first trip down there. Instead, I'd expect a bounce in the ratio from that level.

Finally, let's turn to the Russell 2000 and the question of it outperformed so considerably Tuesday. Well, I can make up a dozen reasons but they would be just that: made-up. Perhaps it has something to do with the rebalancing that is taking place at the end of the quarter, or some folks have started quarter-end markups early. Whatever it is, we'd be rationalizing it. It outperformed, and most of the day it out performed rather handily.

Russell 2000 vs. S&P 500

The only point I can make on this subject is this: The last time this ratio got up over this level was in the spring and summer of 2011. That is quite curious, since that was the last time the market got rather upset over the debt ceiling.


 

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