Bulls Rally Hopes Fade as Big U.S. Bank Stocks Get Crushed
The market reversed its brief bullish momentum and sold-off hard yesterday. Volume was again unseasonably low.
All major indices declined yesterday. And financials, which were down 2.2%, were hardest hit. Many of the big U.S. banks posted substantial losses. Morgan Stanley (NYSE: MS) was down a whopping 7.9% while the other major banks like JPMorgan (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), Bank of America (NYSE: BAC) and NY Mellon (NYSE: BK) were down 3.7%.
Over the past two months I listed my three criteria for a strong bull rally: bank stocks move at least in line with the broad market, small cap stocks outperform the broad market and the U.S. dollar declines. If two of those three trends cannot form neither will a rally. The big bank stocks were crushed yesterday. And that whole sector looks ripe to see additional heavy declines.
Since declining about 7% in October, the dollar rallied 4.4% over the past four weeks. And it was up another third of a percent yesterday. Amazingly, the dollar chart is setup for a huge breakout higher. If it keeps climbing, the market is in for trouble.
Despite a couple nice sessions, small caps really haven't done much over the past few weeks either. And much like the rest of the market, the Russell 2000 small cap index has been trapped in a 4% trading range. The Russell 2000 has strong support at 721 and it needs to hold that price, which is only 1.1% lower from yesterday, if it is to avoid a decline to 695.
Given the underlying weakness in the market, I still won't be trading aggressively bullish. But, as mentioned yesterday, I find no reason to be overly bearish either. The bears have failed to take out any significant support zone over the past month and I won't trade bearish until they can.
The bears will have help today though. Overnight, the indices in Asia were creamed. Europe also trades with heavy losses this morning with France leading the major indices lower, and Germany is not far behind.
Oil, which is up 32% from the $76.25 low, also pulled back overnight. The incredibly strong performance from oil has mitigated the weakness from the big U.S. bank stocks over the past few weeks. And with oil likely to enter consolidation soon, that pullback would take the indices lower unless another sector can begin to display strength and offset that loss.
