Questions about regarding the quick/sharp rally off the March 16th low. They are numerous, and they consist of a number of troubling circumstances that call into question the veracity of the rally. One of the areas that is troublesome is the Banking Index ($BKX), for any rally worth its salt much have the banks/financials as a strong backdrop. Therefore, we must consider whether the BKX will prove to be the "canary in the coal mine" for impending broader market weakness, or whether BKX is simply lagging at this point and will play catch up and outperform. We view the former as the more likely outcome.
Before looking at the weekly BKX chart, we should note that BKX is up a mere +0.3% YTD versus the S&P 500 +6.7% gain. Quite a bit of under-performance to be sure, and certainly troublesome as noted before. Moreover, the weekly BKX chart shows prices are weakening off its February high in tandem with the overbought 20-week stochastic turn lower. This would suggest further weakness towards the 130-week moving average support level. If a decline such as this were to develop in full, then the resultant loss would be on the order of -15% from current levels. Certainly the broader market would be in throes of a decline for this to materialize.
In ending, a lower outcome is likely in BKX given the weekly technicals; and also given that out of all the S&P sectors, only the Energy and Industrial sectors are out-performing the S&P 500 this year. This generally comes during the latter stages of a market recovery. Therefore, broader market caution is advised.