Morning Comment: More upside for banks?.....Lindsey Jacobellis and persistence

As much as the market rallied nicely yesterday…and as much as it seems like the market has been rallying in almost a straight line for the last 2-3 weeks, the S&P 500 and the Nasdaq have actually been stuck in a sideways range over the last four trading days. The question now is whether the glass is half empty or half full. The bulls will say that it’s great that the stock market did not see any downside follow-through after last Thursday’s FB-induced decline. The bears, on the other hand, will say that the lack of upside follow-through from the initial bounce…means that it’s just the same kind of “head fake” rally that we see for 2-3 weeks during most deep corrections and bear markets.

As you probably can guess based on what we’ve been writing recently, we think it’s the latter. Fighting the Fed has never been a good idea…and with the Fed just beginning to tighten…and with the ECB changing their own policy…and with interest rates rising…we think today’s still very expensive stock market has further to fall. In other words, we believe that the action of the last 2-3 weeks has just been Mr. Market’s way of getting the bulls excited again…and getting the bears to cover their shorts…just before we see another leg lower for stock. We’ve just seen Ms. Market do this too many times in the past to think this bounce is for real…given the major change by the Fed and the ECB in recent months. The same thing happens each time. During the bounce, some people start saying that the bearish developments are actually bullish this time…but those comments tend to fade very quickly when the decline reasserts itself. (Notice how we used both Mr. and Ms. Market. 😊)

Of course, they don’t always say that the bearish developments are somehow bullish. Sometimes they say that that the negative developments have already been priced-in. They see the bounce in the stock market…even though the new negative developments still persist…as a signal that the negative developments have been priced-in. (In today’s case, the bounce in the stock market in the face of higher interest rates is leading some people to say that the rise we’ve seen in rates so far have already been priced into the stock market.) However, in reality, these bounces are frequently just moves to work-off a short-term oversold condition in the stock market…and have nothing to do with “pricing-in” the negative developments. Therefore, once the oversold condition is worked-off, the decline in stocks resumes…and people quickly realize that very little has been “priced-in” yet.

This is something we have seen time and again during deep corrections and/or bear markets. Since we have seen a definitive change in monetary policy from several global central banks…and we’ve seen a confirmed change in trend for long-term interest rates in the U.S. and places like Europe…we believe this is another example of a bounce off an oversold condition…and not something that signals that the worst of these changes has been priced-in yet.

Changing gears a bit, the push towards 2% on the 10yr yield (and the steepening of the yield curve) helped the banks stocks rally strongly yesterday. Both the KBE and KRE bank ETFs rallied about 2.5%. Heck, even WFC rallied to its highest level since early 2018! As strong as the rally has been for the bank stocks, neither ETF has become overbought, so they could/should have more upside potential. That said, we do want to note that the TLT (which measures the price in the Treasury market) is becoming somewhat oversold…and the yield on the 10yr note is becoming somewhat overbought. Therefore, if we see a short-term reversal in the bond market, it could/should cause the banks stocks to take a breather. (This will be particularly true if any material move in the Treasury market is due to a “flight to safety” trade.)

With that caveat, we want to point out that the KBE is seeing a positive crosses on its MACD chart. (The same is true for the KRE regional bank ETF). The last several times the KBE has seen a confirmed positive MACD cross, it has been followed by a nice (further) rally in the bank stocks….We do need to point out that the positive cross is not a meaningful one yet, so it’s going to have to see a bit more upside follow through. That said, it’s not very far from giving us the “meaningful” move it needs to signal that the group will indeed head higher. Therefore, whether it happens immediately…or in a few days…the potential is certainly there……We get a key inflation number tomorrow morning (CPI), so we’ll see if that is the catalyst for any move in interest rates/the yield curve…and whether it gives us more clarity on this issue. (See chart below.)

Finally, as we approached the Winter Olympics a week ago, we could not help but remember something that took place in the Olympics 16 years ago. In the 2006 games in Turin, Italy, Lindsey Jacobellis was on her way to a gold medal run in the snowboardcross event…when she did a showboat move…and it cost her the gold medal. She grabbed her board…and when she landed, she lost her balance a bit…and it was enough to let one of her opponents pass her. This mistake became the epitome of what not to do until the race (or game) is over in the world of sports.

The thing is, everything you read about Lindsey Jacobellis told us that she was not a showboat. She was not arrogant or cocky. Snowboarding was a “showboat” sport, so doing what she did was not out of the ordinary. None of her opponents said, “She got what she deserved. She’s always been too cocky for her own good.” Instead, everybody said she was (and is) a fabulous person and a great competitor. Therefore, it was too bad that she blew her chance to win gold. In fact, even though she continued to have great success in the sport in World Cup events, she was not able to win any other medals in future Olympics (besides the silver she won back in 2006). It was really a sad story.

HOWEVER, that all changed yesterday. Jacobellis’s persistence finally paid off. At the age of 36…when the vast majority of Olympic athletes are WAY past their prime…she won the gold medal in the snowboardcross final! What a fabulous story of redemption! However, it is also a GREAT story of persistence.

In other words, Jacobellis has now become a great example for young athletes all over the world. First, she has taught them never to take a victory for granted until the victory has actually been achieved. Second, she has taught them never give up on their dreams…and that persistence is an incredibly powerful force in the universe……….Lindsey Jacobellis is the first U.S. Olympian to win a gold medal in these Olympics…and it’s one of the most impressive Olympic victories in the history of sports.

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

275 Grove St. Suite 2-400

Newton, MA 02466


Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.

Posted to The Maley Report on Feb 09, 2022 — 10:02 AM
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