Follow the money and you can typically arrive at the genesis of your surroundings.
Here is another ratio chart that utilizes the S&P 500 Bank Index from Goldman.
While I usually watch the BKX or the XLF for baromarket pressure differentials
(yes - I did just create that terminology), the GSPBK goes back a bit further
and yields greater perspective to the ratio.
As you can see, the banks considerable underperformance over the past year
has become a worrisome trend. And while the previous bear markets (1990 & 2002)
had similar low pressure zones - they eventually snapped back with great strength
to lead the broader market higher.
Granted, they eventually rolled over with some similarity to the current ratio's
technical predicament - but it was after a much stronger relative performance
trend.
This has everything to do with the interest rate environment transition we
are approaching.
As described in my previous work on the transition to a market environment
with a less accommodative Fed - both the 1994 and 2004 tapes
exhibited diminishing leadership from the banks.
The conundrum is that the ratio is running out of downside field position.
Literally.
If we don't start splitting the SPX or reverse splitting the banks, like Citigroup
- it could flatline in a few years...
(and yes, I am joking and realize there would be no difference - just the
same old ham sandwich)
Although I am an active trader, I have always taken a broad perspective when
approaching the markets. I respect the Big Picture and attempt to place each
piece of information within its appropriate context and timeframe. I have found
that without this approach, there is very little understanding of ones expectations
in the market and an endless potential for risk.
I am not a stock picker - but trade the broader market itself in varying timeframes.
I want to know which way the prevailing wind is blowing, where the doldrums
can be expected and where the shoals will likely rise. I will not claim to
know which vessel is the fastest or most comfortable for passage - but I can
read the charts and know the risks.
I am not a salesperson for the market and its many wares. I observe it, contextualize
its moving parts - both visible and discrete - and interpret.
I practice Market Anthropology - Welcome to my notes.
Erik Swarts is not a registered investment advisor. Under no circumstances
should any content be used or interpreted as a recommendation for any investment,
trade or approach to the markets. Trading and investing can be hazardous to
your wealth. Any investment decisions must in all cases be made by the reader
or by his or her registered investment advisor. This is strictly for educational
and informational purposes only. All opinions expressed by Mr. Swarts are subject
to change without notice, and the reader should always obtain current information
and perform their own due diligence before making any investment or trading
decision.
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