A big July bounce for previously pummeled regional bank stocks, as well as other financial names, has likely gone too far, too fast, a closely followed technical analyst warned in a Wednesday note.
“Banks are in the danger zone,” wrote Jeff deGraaf, founder of Renaissance Macro Research.
“Their relative trends turned negative in our work late in 2022, but their oversold condition this spring made them vulnerable to a bounce,” he said. Bank stocks plummeted in March after the collapse of Silicon Valley Bank and other regional lenders stirred fears of a broad banking crisis.
In March, the SPDR S&P Regional Banking ETF KRE, +2.50% tumbled to levels last seen in September 2020. It’s rallied more than 8% so far this week and just over 14% in July. It remains down more than 20% for the year to date. Other banks have also rebounded strongly in July.
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Renaissance Macro Research
“That bounce has now created an overbought condition, though many remain 10-15% away from natural resistance levels. This move is probably close to exhausting itself, though we’re more comfortable with that call being accurate than precise,” deGraaf said.
Within financials, capital market names are at an extreme, according to the firm’s three-year rolling measure of excessive returns, “and now look vulnerable to an aerodynamic stall,” he wrote. “Trees don’t grow to the sky,” so tapping the brakes on enthusiasm for the group is historically justified.
KRE was up 1.5% near midday on Wednesday, while the equalweight measure of the S&P 500 financials sector advanced 1.6%.
U.S. stocks were higher overall Wednesday, with the S&P 500 SPX, +0.31% up 0.3% after ending Tuesday at its highest since April 4, 2022, and just 5% below its record close from Jan. 3, 2021. The Dow Jones Industrial Average DJIA, +0.41% rose around 140 points, or 0.4%, on track for an eighth straight gain.
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Shares of Dow component Goldman Sachs Group Inc. GS, +1.84% reversed earlier losses to trade up more than 1% after it delivered the only profit-target miss among the six largest U.S. banks as earnings season moves into full swing.
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