Commodities Countdown

Bank Review Three Months After Brexit

Greg Schnell

Greg Schnell

Chief Technical Analyst, Osprey Strategic

This article was first published on June 27, 2016. All of the charts have been updated to check our progress.


Since the sub-prime financial crisis, there has been a lot of discussion about Too-Big-To-Fail, Bank Stress Tests, and Central Banks using unique tools to try and keep the market on an even keel. One of the problems in the world is the deeply indebted government entities. What makes that issue unique is our global commercial banks own government debt as AAA debt to support their loan book. The assumption is that sovereign nations can always raise taxes to get paid back. 

One of the keys to recognizing the Financial crisis in 2008 was that the banks started showing lower lows and lower highs while the indexes tried to make higher highs. Something seemed wrong.


For the past year, some of the international banks have been creating that same pattern. While this declining slope on the stocks can seemingly be ignored until it matters, it should at least raise the antenna of technicians. Fundamental investors will continue to think the stocks are trading at great valuations. When banks don't keep rallying with the market, technicians need to spend more time analyzing what is going on. 

However, with the Brexit results 3 months ago, this appears to be a timely review for a variety of reasons.

  • Some international banks are dropping to 2009 lows. Yes, already at the lows, not the breakdown levels.
  • Banks may also suffer more balance sheet damage from the fallout of Brexit. 
  • Global markets are struggling to find growth. The US has had declining earnings for multiple quarters. 
  • US Multinational banks appear to be in good shape but the charts have some negative indicators.
  • A banker is never going to tell you to sell their stock. 

The only way we are going to know if banks generally are getting in trouble is by watching the price action on a wide spectrum of international bank stocks. Here is a screen shot of the world's largest banks. Hat tip to relbanks.com which produced the list. We don't need to know how accurate the data is as this just gives us a feel for the largest banks in the world. We can select from this list.

On the charts below, I have three indicators.

  • The SCTR is a ranking system that tells you which stocks have the best price action. 99.9 is the best, and 0.1 is the worst. Think of it like who is the smartest student in the class.
  • The green moving average on the chart represents a longer term average. When it is trending up, that is good. Downtrends are a problem. When stocks trade below long-term averages, you should be cautious with owning them.
  • The lower panel is the MACD. This indicator is a momentum measurement that helps us understand when a stock is changing momentum either positively or negatively.

On each price chart, I have three horizontal lines.

  • Red - Recent highs or resistance that the stock needs to get through.
  • Orange dashed line - where the stock chart changes from bullish to bearish.
  • Blue - An important historical support level we do not want to see broken. In some cases it already is.

Probably the largest bank that looks the best is JP Morgan (JPM). Perhaps we can use this bank as a reference chart.

An SCTR level of 78.5 suggests above average performance. On the price action, we are testing long-term highs. Before the final high in 2015, JPM had risen over the last four years.  The orange line at $58 looks like an important support area. It is also where the trend line would connect. This should be long-term support for JPM. A break and weekly close below that would be a trend break for JPM. $52 is a broad 2-year support level. Lastly, $42 which is the level of the stock resistance going back from 2007-2012. When JPM broke above there, it was very bullish. Keep an eye on a breakout to new highs.

 On a comparative basis, JPM is one of the best.

Wells Fargo (WFC) has an SCTR of 9.9. As an SCTR of 100 is the best-performing stock, Wells Fargo is one of the worst performing large cap stocks. That is a problem. Looking at price, we have a declining green moving average, the stock made highs 12 months ago, and we are testing critical support at $45. The MACD is negative and has rolled over just below 0, indicating a very weak momentum stock has just gotten weaker. This is a weak chart if you are bullish on American banks. $45 must hold.

US Bancorp (USB) is next. The SCTR shows 48.8 in the Full Quote panel at the top. The stock is behaving better than 30% of the stocks in the large cap arena. The bad news is the SCTR is oscillating in the middle of the range so it has not been able to break out and show leadership. As the SCTR has oscillated between 30 and 70, USB has been an average performer, just travelling with the pack. USB has rallied from a low momentum level around zero after Brexit, so that was a positive development. 

Looking at Citi (C), it has rallied from the Brexit lows with the other US large cap banks. Sporting an SCTR of 61.4, we shouldn't get too excited. The dramatic cliff in Citi back in 2007 makes this chart so compressed. Look at the second chart of Citi below, which starts January 1, 2009. That allows us to see what is going on better by removing the cliff.

The chart below is for Citi (C), the same as above, without the cliff. While Citi is nowhere near 2009 lows like some of the charts we are going to get into, the moving average in green has a negative slope. The chart has already fallen below the base of the last 3 years, shown as a dotted orange line. Citi has moved back above and now it is trying to find support at the orange line. With the recent move above $48, Citi has a series of higher highs and higher lows now, so that is good to see. The MACD is around zero and still needs to get going. For me, the SCTR continues to struggle to get above 75, which would be showing leadership. 

Bank Of America (BAC) had the same cliff drop as Citi, so the chart has been shortened to start at 2009.  The pattern is the same. BAC was able to make a higher high recently which changed the trend from lower highs to higher highs. The MACD is right around zero showing flat momentum. Looking at the SCTR, we can see the stock continuously oscillates through a huge range. From 10 at Brexit to almost 90 recently. Unfortunately, a stock chart likes this wears out investors as it has chopped around in a range for 3 years. The good news is that it has moved above the 40 week moving average.

In Summary, the American large-cap banks rallied from the Brexit lows, but have stalled on their journey to become the new leaders for this market. In June, I mentioned the charts must find support right at the Brexit lows and they did that. The exception would be Wells Fargo which has just revealed some internal control issues and is revisiting those lows.

Canadians are a large group who read my work. I'll post one of the typical Canadian bank stocks and then move into the European and Asian banks. Toronto Dominion Bank (TD) fits that description. Looking at the SCTR, this is not a strong chart. The stock has an SCTR at 49.5 which is just average. StockCharts added some international companies to the SCTR listings in 2014 which is the reason the SCTR starts in that year for a lot of the charts below. All the Canadian banks were rocked by the fallout in oil. The price action recently has surged above the upsloping 40 Week moving average in green which is more bullish than the US charts above. But after spending 3 months going sideways and unable to make it back up to test the former highs, this $45 level looks like important resistance. The MACD has just gone below its signal line so it has rolled over on this weekly chart giving a 'sell' signal. There is also negative divergence. This is not a positive development to have negative divergence from the pre-Brexit highs. 

 Here is the centre of the Brexit storm, Lloyd's of London (LYG).  The SCTR shows 1.7 which is close to the worst stock behavior of the large cap peer group. This stock appears to be struggling to get back through the red resistance line at $3.10. This stock had a rally off the very low levels of $2.43 and rallied to $3.32. Now we reach the hard part. Can this stock hold up here, or does it go on to break down? I would suggest it needs to get back above the $3.10 level soon. 

Due to the size of the charts, I'll continue this article, in the next blog. The European and Asian charts are still must-see material. 

Greg Schnell, CMT, MFTA.

 
Greg Schnell
About the author: , CMT, MFTA is Chief Technical Analyst at Osprey Strategic 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