Lots of eyes on the banks this morning. We know the Fed is buying up debt, whether it be quality corporate bonds or toe-the-line high-yield (aka junk) bonds via two major ETFs: the iShares iBoxx Investment Grade Corporate Bond ETF (LQD) and the SPDR Bloomberg Barclays High Yield Bond ETF (JNK) . Both ETFs are up 20%+ from their March lows. Ironically, that aligns well with equities and precious metals. The correlations across those three VERY different investment options are near 1.0 for the past month.
What does this tell us?
The market is still bearish despite the big bounces. When correlations run to 1.0 in asset classes that traditionally have no correlation, it's not a positive. We do have the Fed throwing trillions of dollars at the market, so what bearish may mean now is different than what we've seen traditionally. Now, it means there is nowhere to hide whether you are long or short. If anything is moving together up or down, the traditional belief of diversification is out the window in the short-term. Cash is about your only diversification. And that makes sense if you believe equities and precious metals are hedges against inflation because cash would take the hit. Bonds, well, they are getting the benefit of the Fed using cash.
But back to the banks.
Yes, they look poor today in comparison to the overall market, but I won't declare them or the rally dead yet. The recent underperformance could merely be a bullish flag pullback if we examine the daily chart. A pop two trading sessions ago followed by two days of opening high and trading to the lows. However, if we don't close under $22, it's premature to call the rally over. We could be merely consolidating the Thursday move higher.
The Full Stochastics have hit oversold territory and threatens to cross bearish. That would be a negative. The parabolic stop-and-reverse (PSAR) is teetering on flipping bearish. The stock price is approaching a major convergence point of three trends (support levels), so there is a valid reason to watch and be concerned, however, don't anticipate the breakdown. A move above $23 and we may see buyers flood into the Financial Select Sector SPDR Fund (XLF) yet again. If we do see a break below $22, on volume, then I would anticipate a quick 5%-6% correction in banks and 3%-4% on the S&P 500. The Nasdaq continues to outperform while small caps continue to underperform, so if you are picking other spots for shorts, keep that in mind.