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Banks still key for technicians

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Today's economic data doesn't appear to have been taken as negatively by the MARKET as some may think. After all, one of the key sectors that should have EXTREME financial risk under the scenario of a weakening economy, not only helped lead the S&P 500 Index (SPX.X) 902 -1% and S&P 100 Index (OEX.X) 456 -1% to their recent relative highs, but the S&P Banks Index (BIX.X) 285.8 -0.18% still holds yesterday's lows and still has its reverse head/shoulder pattern still in play.

S&P Bank Index (BIX.X) - Daily interval

In our Index Trader Wraps, we've looked at the BIX.X and placed it in our pivot analysis matrix. I would have thought that the BIX.X would have gotten hit pretty hard today considering EXISTING home sales came in below expectation and not generating a lot of new mortgages. Could it be that "smart" investors have already refinanced their illiquid assets (a house is an illiquid asset). Today's weakness in EXISTING home sales isn't necessarily "bad" for the economy, but it may be "bad" for the homeowner that sees his/her illiquid asset probably declining in value. This can weigh on the consumer's mental wellness. Unless of course they refinanced their house and shifted the risk to the banks and sit on cash in their accounts that can carry them through the tough times.

On the other side of things, NEW HOME sales jumped in March, and this is the "category" of housing that has the greatest impact on the economy. Buy a new house and you or the builder installs new durable goods like washing machines, dryers, dishwasher, furnaces, air conditioners, etc.

While I "foresee" a pullback in the S&P Banks Index (BIX.X) into its "neckline" I would have thought the MARKET would have really sold this sector today if it thought the economic data was really bad. Time will tell, but this banking index, or at least the banks that comprise it, are directly tied to the U.S. economy and American's ability to repay debts that they've borrowed from these banks.

Keep an eye on the BIX.X and try to tie in how its components interact with the economy. And how buying/selling in its components by the MARKET give insight into things.

On the above chart, I've placed a similar upward regression channel on the BIX.X as we've done with the SPX and OEX in recent days. I've projected a "May 13" date on the chart, which has the lower channel intersecting the neckline. I'm also keeping and eye on Dorsey/Wright and Associates "banks bullish %" (BPBANK) which reversed back up in recent weeks and now reads "bull confirmed" at 66%. What's interesting with this indicator is that in January, this bullish % reached 62%, then reversed down to 56%, but now has a new relative high. This is DIVERGENCE compared to the SPX and OEX bullish % readings on a relative basis and shows the banking sector is actually quite strong on an internal basis. This makes no sense if the economy is going into the tank.

So... I'll keep following and updating this in our Index Trader Wraps.

I did post a "YIELD Alert" in the market monitor this morning, when the longer-dated and "riskiest" 30-year Treasury ($TYX.X) traded a 4.80% YIELD. Current yield on this bond is 4.816%, so we've seen fractional selling in this bond since that alert was given. I would NOT say that I would expect a sudden "asset allocation" (selling in the bond to move toward stocks) or a rush into the bond (buying in the bond to capture YIELD before it goes further lower), but this downside YIELD alert is concerning to equity bulls as I can't figure out who would want to buy a 4.8% per annum YIELD and hang onto it for 30-years. Unless of course, the economy is going into the tank!

I guess this is why I've got a close eye on the BIX.X, and I think traders/investors should too.

The AMEX trades the Regional Bank HOLDRS (AMEX:RKH) $102.20 -0.34%. It's "neckline," which would tie in with the above BIX.X chart is at approximately $100.84.

Now... I can't say emphatically that the SPX and OEX move "twice as fast" as the BIX.X, but a decline to about $100 in the BIX.X is about 3%, so I might then look for a 6% type of pullback in the OEX/SPX from current levels.

Given the SPX is off -1.3%, lets forecast an SPX profit taking pullback or risk assessment to 846, which would be a 6% decline from current levels of 900 trade. While not a pleasant thought for bulls, remember where the SPX has come from in the latest month. Hmmmm..... April's MONTHLY pivot in the SPX is 844.

Jeff Bailey

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