Thursday, October 14, 2010


We were tossing around a question yesterday regarding the current stock market rally from the July lows, and whether it can continue without the banks participating. The banks in this discussion are the big boys – JP Morgan, Citigroup, Bank of America, Wells Fargo, etc. The S&P 500 is up 15.5% from the July low (before today’s action which was a 4 point loss) while the banks, as measured by KBE (SPDR Bank ETF), were only up 4% from the July low (although down 2.5% today). Additionally, as you will notice in the chart below, the banks are still down over 19% from the April highs. The S&P 500 is the red line, which is approaching the April high after breaking through the June and August highs, and the KBE is the blue line, which has failed to make a new high!

Even so, at this time, the answer to our question is “yes.” The markets can and have rallied without the banks and it seems like they will continue to do so on the back of Federal Reserve stimulus. Consumer Staple stocks and Utility stocks have already surpassed the April high mark with Technology and Industrials hot on their trail. Material stocks are up 26% and Energy stocks are up 21% from the July lows. It is not only a rally but an incredibly strong one for many sectors and industries.

It seems this is just a bank specific issue at the moment as other financial industries like Capital Markets are fairing much better. Today, the cost of insurance for bank stocks is on the rise as indicated by rising Credit Default Swap levels. The fallout from faux-closure and a weak JP Morgan earnings report are causing investors to re-price risk in these stocks. All the while, investors in other stocks could care less.

But I can’t help but feel like it is 2007 all over again. The financials began selling off before any other sector in the market and we all know how that episode ended. Could MBS be the market’s downfall again?