What do bank stocks know?

samsonBank stocks are considered a ‘leading indicator’, especially in this market. A leading indicator is like saying they’re a canary in the coal mine- what bank stocks are doing is often a short term prediction of what the market will do next.

So let’s take a look at what bank stocks know currently…

First let’s look at the overall market, starting with the S+P 500:16141

A rough week for the S+P that pulled it back under resistance after a brief visit above it (straight blue line). A further correction down to the 1810 area would be expected and healthy. The S+P ‘feels’ as if it’s on the last innings of a long bull market, it looks tired.

Now here’s the Nasdaq:
16142

Also correcting, but still very much within its upward channel (straight blue lines). Overall, the Nasdaq look as though it has more juice in it, social media and healthcare stocks a theme for 2014. Again, a rough week, but a correction would be expected and healthy, especially if it stays above 4080.

But now let’s look at XLF, a proxy for financial stocks:
16143

The financial stocks are also in their ascending channel, but look what happened last Friday (my arrow). Those stocks ended the week UP, and if XLF breaks up above $22, this week even better.

A good way of spotting where the strength lays in a market is by seeing what stocks do well in a bad week for the overall market, and that’s what bank stocks did last week. This fits in with my comments for 2014 last week: financial stocks will be the beneficiaries of the ongoing money-printing, and could push higher now. And if you believe that financials lead the market, the omen is even more bullish.

But stay sharp. Make no mistake, there is plenty of money to be made in 2014, but the gains may be focused on certain industry sectors that have some fuel left to go higher. Focusing on these areas is our focus, as is watching the overall market for any possible correction on the horizon, but being in the right stocks with tight stop losses will protect you.

Bottom line, the market is still in a bull run, but we now need to watch for any shift in trend. Meanwhile, bank stocks are telling us to (cautiously) stay bullish.

Best,

Jim.

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