January 15, 2020
By Mish Schneider
And he did for a day, but not today.
In fact, KRE’s moniker as the Prodigal Son, typically works out as well-deserved.
In the Bible, the Prodigal Son had a loving father, a good home, provision, a future, and an inheritance, but he traded it all in for temporal pleasures.
As a result, he came home penniless and asked for forgiveness, which his father granted him out of compassion.
This week, JP Morgan posted extraordinary earnings.
Aided by the rebound in trading revenue, the strong results in trading helped offset the impact of compressed margins across retail and commercial banking businesses as interest rates dropped.
So, the Federal Reserve is the father who has given money to the banks through not only low interest rates, but also, through the billions they have added to the financial markets through repos.
Despite the repos, KRE (the ETF basket for the smaller banks and not JP Morgan), appears to have slinked home in trouble once again.
Will forgiveness come as easily this time?
Today, for the first time since October 2019, KRE broke below the 50-daily moving average.
That puts it in an unconfirmed caution phase.
Furthermore, the magenta line or 10-DMA is negatively sloped and looking like it could cross below the 50-DMA.
The slope of the 50-DMA is neutral after having a positive slope.
Put this all together, and unless KRE can close back above 57.05, it probably means it’s selling time again.
KRE has served as a lead indicator in the past. Most noteworthy was back in October 2018, when the S&P 500 was making new all-time highs.
KRE was the first sector to sell off. And we know what happened next-a 20% correction took out a lot of profits, not to mention quieted all the so-called “geniuses” that appear in easy bull runs.
Under 56.00, especially on a closing basis this week, will spell trouble.
It will certainly put our Prodigal’s breakdancing hobby on hold.
So, watch KRE carefully, and should the Russell 2000 IWM, Transportation IYT or even Semiconductors SMH, also red today, follow in kind, be ready.
Remember, the Fed can only do so much in this economic environment without sparking----wait for it---stagflation.
Russell 2000 (IWM) Made a new January high and now 165.67 pivotal
Dow (DIA) Made a new all-time high. 288.15 the level to hold
Nasdaq (QQQ) 217.75 support to hold
KRE (Regional Banks) 57.05 resistance with 56.00 support to hold
SMH (Semiconductors) After making a new all-time high it broke the 10-DMA today. The moth’s low or 139.77 important to hold
IYT (Transportation) 198.50 pivotal support
IBB (Biotechnology) 120 now pivotal
XRT (Retail) 45.50-46.00 pivotal resistance. 44.90 the 50-DMA
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