The New Bank Trade

We were super bullish on banks in the back half of last year.

They were the ultimate Trump trade ahead of the election.

The SPDR Bank Index $KBE rallied 45% from its summer lows to its Q4 highs.

We wrote about the strong correlation between banks and Trump’s odds to win the election last year. That was the signal for almost all of 2024. If you called the election right, you nailed the bank trade.

And we did just that.

But today’s action in the banks looks a lot different than it did just a few months ago.

We no longer have election odds to trade on, and the market seems to have priced in all the potential deregulation gains… and then some.

SPDR Bank Index is down almost 17% from its December highs.

This has been a nasty corrective wave, and it is showing no signs of stopping. KBE is down over 3% today and is resolving lower from a bear flag.

But it is where this is happening that should draw concern from the bulls. Take a look at this KBE chart zoomed all the way out. 

It’s a beautiful base, but it is failing. And it is failing at a major resistance zone marked by the financial crisis highs.

Let's zoom in on KBE now:

This short-term pattern resolution at a critical polarity zone puts us on lookout for a fast move to the downside.

And it’s no longer about Trump's election odds for the banks. That relationship has come and gone, and banks are back to trading in lock-step with the bond market.

I believe higher rates will continue to put a damper on bank performance. At least, that’s what the market is suggesting.

The index is breaking down from a multi-week coil today ahead of big bank earnings next week. Meanwhile, rates are ripping to new highs as treasuries break down.

The bottom line is if the 10yr yield sticks this breakout, it is hard to be bullish banks. When we look at the price charts, it tells the same story.

If we zoom all the way out, we are failing and falling back in the box.

If we zoom all the way in, we are resolving a bear flag lower.

And when we consider the intermarket picture, interest rates are confirming this price action.

It’s a new regime for the banks. The Trump pump has come and gone. Deregulation tailwinds are giving way to renewed balance sheet concerns. 

Remember the bank runs and blow-ups from a few years back?

I am not saying we are going back there, but I do think we need to keep an open mind. We will learn a lot when this group starts reporting next week. I’ll be paying close attention and will report back soon.

Have a great weekend.

Steve