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Banks Recent Drop May Only Be The Start

By Michael KramerStock MarketsJun 18, 2021 04:50AM ET
www.investing.com/analysis/banks-recent-drop-may-only-be-the-start-200586879
Banks Recent Drop May Only Be The Start
By Michael Kramer   |  Jun 18, 2021 04:50AM ET
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This article was written exclusively for Investing.com

Financial stocks have come under considerable pressure over the past week, which could be the start of something much bigger. Bond rates have fallen on the long end of the yield curve, resulting in spreads contracting. The widening spreads and rising rates helped lift bank stocks over several months; tightening spreads and sinking rates will push these stocks lower. 

Add to this recent news that JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) expect second-quarter trading revenue to be weaker than in past quarters. Activity in the broader equity markets appears to have calmed dramatically over the past few months, and lighter trading volumes will not help these banks as we head into the third quarter.  

Tightening Spreads

The biggest problem for the banks is the falling interest rates on the longer-end and rising rates on the shorter end. For example, 10-year yields have fallen by more than 20 basis points since May 13, to 1.5%. Meanwhile, the 2-year yield has risen by around 6 bps to 21 bps over the same time. This has tightened the spread to 1.29% from a peak of 1.55% on May 13. 

10-2 Year Treasury Spread Daily
10-2 Year Treasury Spread Daily

As the spread compress further, it is possible the bull run in banks is over, and these stocks will decline even more. Although it may seem hard to believe, given the amount of talk around inflation and rising rates, there is a genuine possibility this happens.

The Pivot

The Fed made a significant pivot on Wednesday when their quarterly projection showed two rate hikes by 2023. The forecast showed overnight federal funds rates rising to 60 bps. That is much higher than the current 21 bps of the 2-year bill. That means that over time markets are likely to begin to anticipate rate hikes. That anticipation is what will push yields higher on the short end of the curve.  

Additionally, as long as market forces continue to stay in play and central banks like the Fed and the ECB continue to buy longer-dated bonds, rates on the long end of the curve are likely to remain contained. Also, commodity prices are falling sharply, and should the dollar strengthen further, those commodity prices will fall even more. This means the recent spike in inflation will decline, sending rates on the long end even lower. 

JP Morgan Daily
JP Morgan Daily

Technicals Breaking

The technical in the banks is suggesting there may be more pain to the downside. JPMorgan is already exhibiting several bearish trends after breaking a critical uptrend that started in late 2020. This coupled with a relative strength index that is now trending lower, suggests that the stock may have changed trends, and appears to be heading towards its next level of support, around $146. 

The trends in Citigroup are just as bad, with the same long-term uptrend now broken and a relative strength index that has reversed lower. Both indicate that Citigroup likely faces a reversal of its long-term trend, and a break below support at $68.50 may send the stock to around $63. 

Citi Daily
Citi Daily

A breakdown in the financial sector could be a big problem for the broader market if this trend persists. By the end of May, the financial sector contributed nearly 3.1% to the S&P 500 return of 12.6%, based on S&P Dow Jones Indices data. If the financials fall further, the broader index will need another sector to pick up the slack. It may fall on the shoulders of technology once again.

Banks Recent Drop May Only Be The Start
 

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Banks Recent Drop May Only Be The Start

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Comments (12)
Rob Fordham
Rob Fordham Jun 19, 2021 11:42PM ET
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This guy writes a differnt opionin each week good for clicks not investing
Rob Fordham
Rob Fordham Jun 19, 2021 11:41PM ET
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This article is a prime example of overthinking which typically causes shaky conclusions
Nityananda Singha
Nityananda Singha Jun 19, 2021 2:04PM ET
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You are jumping the gun too fast. This is a crazy market. Things will be very different this time next year with many retail investors who will never come back in market for next 20 years. Mother of all crush coming. Just wait and see.
Semih Unalan
Semih Unalan Jun 19, 2021 12:14PM ET
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Bla bla bla
Edgar Pineda
Edgar Pineda Jun 18, 2021 3:50PM ET
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Good time to buy call puts in options check the one day chart
Edgar Pineda
Edgar Pineda Jun 18, 2021 3:46PM ET
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Thank you for this good news I alredy bought puts on several banks is exciting
Junior Moreno
Junior Moreno Jun 18, 2021 12:55PM ET
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With the international market drowning in liquidity, banks are no longer able to do what they should with the money. As a result, in the US, banks are "returning" this liquidity to the Fed, through the uninterested deposit mechanism in the Fed for a single night. 1) the first next trigger, which will bring the S&P500 down by more than 25%, will be the meltdown of US banks;  2) in second place, we have the reheating of the China-US trade tensions. Biden recently visited Europe with the aim of joining forces against China. 3) third, with or without an interest rate increase by the FED until the end of 2021, "real" US inflation already exceeds 70% (this number can be seen in US stock indexes, the destination of most of the liquidity injected into the system).  CONCLUSION:  What we have today in the US is just an illusory "appearance" of wealth, the dollar is dead, the people have no purchasing power, despite having some deposited money.
Jimit bhatt
Jimit bhatt Jun 18, 2021 12:55PM ET
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Why didnt you also add we're all gonna die and what's the point in life to this?
Alex Malmstrom
Alex Malmstrom Jun 18, 2021 12:55PM ET
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Jimit bhatt  You don't like reality, do you?
gc Myers
gc Myers Jun 18, 2021 12:50PM ET
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like these guys ever tell it like it is. lmaooooo. now if they said up id get worried.
Puk Pups
Puk Pups Jun 18, 2021 7:35AM ET
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In this July Michael Kramer will write absolutely  different article- how profitable banks and why you need to buy GS, C, JPM,.... I've seen this before. I have very good memory .
jatin shah
jatin shah Jun 18, 2021 7:35AM ET
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make trend your friend boss don't stick to one thing change with trend.
Puk Pups
Puk Pups Jun 18, 2021 7:35AM ET
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jatin shah  There are no obvious trends, but there are manipulations in order to honestly take money from naïve investors. Imagine that you are looking at your bank deposit, and it changes by 1% -5% every day? And how the value of a company can grow several times and at the same time be unprofitable for many years. This whole situation is absurd.
Puk Pups
Puk Pups Jun 18, 2021 7:30AM ET
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Only TESLA and PALANTIR profitable ....All banks and financial companies are useless ...We should sell everything and buy more BUBBLES ! Manipulations with 10 Years Yield , Gold, Crude Oil , Banks ,.... If Now  FINANCIAL SECTOR is not making money then no one in the world   profitable, no point to buy anything  !
Joel Schwartz
Joel Schwartz Jun 18, 2021 5:37AM ET
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Long $FAZ . The banking sector is about to crater in a deflationary environment.
Huaxia Yu
Huaxia Yu Jun 18, 2021 5:37AM ET
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if u really want to short xlf,just short the *****call,long faz not only super high risk with minimum benefit plus you loose the value of all greeks for sure you will loose a ton if yoy keep this pattern
Igor Ruban
Igor Ruban Jun 18, 2021 5:03AM ET
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How much you lost money shorting stock market haha?
 
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