Here’s a chart from Bloomberg via Andy Lee of UBS on the BKX banking index since 2008.
Andy says this is bearish not just because the March 2009 trendline has been broken but also because you can see a clear head and shoulders top pattern by looking at a longer view.
He also says:
The third chart shows the S&P 500 investment bank index relative to the S&P. This has broken even further through any support and is rapidly approaching the March 2009 relative low.
Finally the 4th chart shows US M2 money supply excluding the Fed balance sheet, which reflects a similar picture. I have not overlaid this with the relative bank charts because there are slight timing differences, but as you can imagine there is a close relationship. The banks are clearly not going to offer any positive leadership which leaves the S&P looking very vulnerable.
(third and fourth charts below)
Of course, I take notice of these kinds of charts because I see a global growth slowdown that makes the financial sector vulnerable to earnings losses from under-reserving. But, what about the opposite side of that argument. What sector could take leadership in the S&P? How about tech? Marc Andreessen for one says tech is undervalued. In fact, he says “the market hates tech.” Obviously, Andreessen is much too close to the situation to be objective. But IPO deals like Groupon are a clear indication that the risk-on trade is alive and well.
My view: I think tech is back to where it was before the party like it’s 1999 Internet heyday. And that’s with a market multiple in line with the market. So, the premium for tech has vanished because people recognize that chasing growth has caused them to be burned. But does that mean the market hates tech? No, tech is back to it historical pre-Internet position in line with the market as a whole. That does open up an opportunity for the sector to outperform, though. That’s not my view but one to think about.