Banking stocks in the U.S. are breaking down. The leading indicator for banking stocks, KBE ETF, representing regional banks, is breaking through support. The finance sector, with regional banks in the lead, have been leading stock markets higher since last summer. After 12 months, that trend is coming to an end.
Banking stocks are drifting lower because intermarket dynamics. The primary dynamic since last summer has been rising rates. As interest rates move higher bond prices go lower, a basic correlation. Rising rates are good for the finance sector in general: banks earn more money on their loans, insurance companies as well.
Now that dynamic is changing. Rates are falling now, and Treasuries are breaking out as seen on this chart. A trend change is taking place in the primary intermarket dynamic: as rates are falling, banking and finance stocks move lower.
That could be an important trend change for broad stock markets. The former leader of stock markets pushed stock markets higher, so with the ongoing breakdown it could really result in serious pressure on broad stock markets.
The point is this: if there are not sufficient other stock market sectors who can take over the lead we will most likely see a period of stagnation or decline.
Last summer we correctly predicted the boom in banking and finance stocks: Financial Stocks Will Be Outperformers In 2017 is what we wrote early October last year.
Right now we believe that U.S. stocks will underperform. With falling rates we believe safe havens like gold, silver, the Yen and Treasuries will do well. Moreover, stock markets in emerging markets, especially India, large caps in China and Latin American stock markets will be the outperformers.
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