Watch this trend line for signs of a banking sector recovery
The financial sector's technicals are looking more bullish after earnings week, with the MACD above the signal line and the price above a volume support. Banks reported mixed financial results, with sales 4.3% above Street expectations, but earnings 3.3% below Street expectations. The earnings came in weak mostly because banks set aside big piles of cash to guard against future loan losses. So overall, the reports were quite strong and banks look better protected against the coming solvency crisis.
I expect the narrative around banks to remain somewhat negative anyway, with CMBS delinquency rates up 3x in 3 months to 10.32%; Moody's downgrade-to-upgrade ratio near the highest ever; residential mortgage forbearance up to 8.7%; and the annualized corporate default rate higher than the 2009 level. These numbers appear to be worsening every month.
However, any news of stimulus from Congress could allay solvency fears for the near-term and send bank stocks into a new uptrend. Banks have currently made a downward-sloping trend line from their February peak, and with stimulus likely to be announced by the end of July, I think we're likely to see a move upward through the trend line this month. I don't know that I'm prepared to invest a bunch of money in bank shares with the narrative so negative right now, but August 31 calls on XLF at the $24 strike look like a reasonably low-risk gamble, especially if we get a trend line break. (I'd consider taking a real, long-term stake in XLF shares if it retested the $20 or $18 levels.) A couple ways to play this would be to alert the trend line and enter after a break, or to alert the supports at $23.50 or $23 and enter when it hits those supports. You'll get better prices on option calls if you buy the supports rather than a confirmed break of the trend line, of course.
(P.S. Goes without saying, but this is an idea only and not investment advice.)
I expect the narrative around banks to remain somewhat negative anyway, with CMBS delinquency rates up 3x in 3 months to 10.32%; Moody's downgrade-to-upgrade ratio near the highest ever; residential mortgage forbearance up to 8.7%; and the annualized corporate default rate higher than the 2009 level. These numbers appear to be worsening every month.
However, any news of stimulus from Congress could allay solvency fears for the near-term and send bank stocks into a new uptrend. Banks have currently made a downward-sloping trend line from their February peak, and with stimulus likely to be announced by the end of July, I think we're likely to see a move upward through the trend line this month. I don't know that I'm prepared to invest a bunch of money in bank shares with the narrative so negative right now, but August 31 calls on XLF at the $24 strike look like a reasonably low-risk gamble, especially if we get a trend line break. (I'd consider taking a real, long-term stake in XLF shares if it retested the $20 or $18 levels.) A couple ways to play this would be to alert the trend line and enter after a break, or to alert the supports at $23.50 or $23 and enter when it hits those supports. You'll get better prices on option calls if you buy the supports rather than a confirmed break of the trend line, of course.
(P.S. Goes without saying, but this is an idea only and not investment advice.)
Comment:
Moody's forecasts that the worst is yet to come for banks' consumer loan assets as forbearance and stimulus programs abate. "We expect credit card and auto loan charge-offs to peak in 2021" at around 7% and 1.5% respectively. www.moodys.com/...ontentpage.aspx?docid=PBC_...
Comment:
XLF briefly crossed the trend line this morning before pulling back. What drove the move was probably IHS Markit's Sector PMI data this morning showing that business activity for the sector modestly increased in July. Watch closely for the possibility of a more decisive trend line cross soon. www.markiteconomics....4718a82a201e64ab38b7
Comment:
