The Canadian Technician

Buffalo Run on the Banks

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The financials are a large component of the $SPX, but the broader market has stepped higher while the bank industry has been on hold since the big banks started reporting the week of April 13th. Much like buffaloes running around a rub rock, it seems the banks are racing ahead in circles before another Fed meeting.

The banks have caught a breath of fresh air, with strong surges two days in a row. With all the hot sauce the Fed poured on the financial sector, it's a wonder they ever paused.

The enthusiasm over the last two days has been a stunning addition to the overall market gains. While tech seems to be pausing or topping out, the bank rally has to be considered a surprise, with month-end mortgage payment data and credit card payment data expected to be light. Into the fear of the unknown, banks rally like there is no tomorrow.

I also noticed insurance stocks gaining this week as well. Some insurance names showed up on my scanner on Friday, but the rally gun fired off on Monday morning.

Next, we have the broker dealers and the exchanges ETF (IAI). It is also trying to break out to the topside.

While there are other groups in the financial sector, those shown above are all sitting at resistance now.

After the $8 trillion, is there more upside? It would seem worthy of rewinding the tape on the Fed actions.

Back in February, the Fed started lowering interest rates to be "supportive" for the economy, but did not see any problems ahead. With cuts continuing into the new year, the market soared to new highs. In March, as COVID was firing up, the Fed unleashed a rate cut between meetings that had lots of TV commentary wondering why they moved so early and generously. Fed members talked softly about keeping the economy firm and strong. Still, within March, the Fed launched trillions in programs and cancelled their March meeting. As April rolled in, the Fed committed to buying corporate junk bonds as well.

To me, this had the effect of setting a table with zero downside. With every market comes a surprise. The biggest surprise for me was not the Fed action. In a few of my subscriber videos, I posted a note I wrote from one of my 2012 chart notes:

"February 3, 2012: If the Fed is announcing some sort of fiscal measure in concert with other world banks or special arrangements, get long the market...be it Christmas, Thanksgiving, July...just get long the market at the lows."

Or, the market was spectacularly undervalued in September at 3.5% unemployment when the Fed started to reduce rates toward zero. As the world tries to go back to work, the market is already priced at where it was before the rate cuts started.

For me, it does seem like we are trading on thin ice, not the firm packed soil of a buffalo run. As everyone is now convinced we are going to rally further as the economy opens up, it seems the opposite to me. Buy the rumour, sell the news. With the news of the economy opening back up and the lead names stalling, it seems that selling the news could be the better strategy.

One of my fellow traders just announced we are back in a bull market with lots of fed support. Buy every dip!

I'll let you decide whose right. But there is nothing wrong with being nimble and cautious! Let me leave you with another quote from myself in 2012:

"One more piece of advice. If the $VIX has fallen for one or two months without staying above the BB centre line for more than a week, the market may pull back, but it will go higher before making a final top. DO NOT ATTEMPT TO MAKE THE ULTIMATE SHORT TRADE."

Good trading,
Greg Schnell, CMT, MFTA
Senior Technical Analyst, StockCharts.com
Author, Stock Charts For Dummies


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Greg Schnell
About the author: , CMT, is a Senior Technical Analyst at StockCharts.com specializing in intermarket and commodities analysis. He is also the co-author of Stock Charts For Dummies (Wiley, 2018). Based in Calgary, Greg is a board member of the Canadian Society of Technical Analysts (CSTA) and the chairman of the CSTA Calgary chapter. He is an active member of both the CMT Association and the International Federation of Technical Analysts (IFTA). Learn More
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