Prodigal Son Regional Banks – A Ball and Chain

With the Russell 2000 breaking out over the 50- and 200-week moving averages, we should see nothing but blue skies, right? Maybe.

We have lots of positives based on hope, of course. Retail (XRT), as featured a while back, is doing well. Sister Semiconductors (SMH) is on the road less traveled to new all-time highs. Transportation (IYT) faces a critical test at the 200-WMA. Biotechnology (IBB) consolidates over the 5-year breakout.

So, what’s up with Prodigal? Should we worry?

Regional Banks (KRE) are in a bearish phase. The sector is having 2 inside weeks.

Two scenarios are likely from here. The first is that yields rise a bit, the Dollar strengthens, and the banking sector sees money rotation into it. The second possible scenario is that, as the bankruptcies increase, the corporations get stronger while the populace gets poorer, KRE reflects the more insidious potential of the market – the one where an increasing jobless market coupled with social unrest becomes the “storm the Bastille” of the 21st century.

Or, the one where the house of cards comes tumbling down.

There is a third possibility that does not entail money rotation or a market crash. The end of banking as we know it, where alternative currency replaces paper money and folks find new ways to borrow and save…

  • S&P 500 (SPY): 325 now pivotal support, 332.58 a gap to fill
  • Russell 2000 (IWM): 150 pivotal
  • Dow (DIA): 270 resistance, 262.50 support
  • Nasdaq (QQQ): Low volume on new highs, 170 pivotal
  • KRE (Regional Banks): 38-40 resistance to clear
  • SMH (Semiconductors): 165-168 pivotal support as it busts out of an ascending channel
  • IYT (Transportation): 179-180 resistance
  • IBB (Biotechnology): 142 resistance, 136 support
  • XRT (Retail): 50.00 resistance
  • Volatility Index (VXX): 27.92 the 200-DMA broke today
  • Junk Bonds (JNK): Risk appetite on but not as hungry
  • LQD (iShs iBoxx High-Yield Bonds): 137.50 support

Mish Schneider

Director of Trading Research and Education