The Stock Market's House of Cards is Shaking

Here’s the situation…

The “Big Bank” ETF (KBE) is down 6% from its highs.

The regional bank ETF (KRE) is down 7.5% from its highs.

The S&P 500 ETF (SPY)? It’s only down 1% from its highs, but that’s about to change as people start talking about the banks. Here’s why.

Bank Earnings - "The Canary in the Coalmine"

The banks are notorious for leading the market higher, especially ahead of earnings season. And there’s a reason.

The banks act as an economic “canary in the coalmine.” When the banks make money, we’re all making money. When they catch a cold, the market coughs.

So far, we’ve seen lackluster earnings results from the banks that have reported. They’ve all given us reason to wonder what’s ahead for the economy, but none of the results have validated their current valuations.

What I’m really trying to say is that the earnings haven’t blown investor’s hair back, and that’s the real problem.

We charged into earnings season with bullish sentiment climbing off the charts. The CNN Fear and Greed Indicator is still registering readings well into the “Greed” territory. And so far, those elevated expectations are far from having been met.

The market almost never rallies in these situations.

Bottom Line

Here’s how this plays out.

The regional banks are “ground zero” right now. Remember, this is the group that caught fire last year as we saw failures emerge from the regional banking sector. For that reason, this sector is your “canary in the coalmine” today.

The SPDR S&P Regional Banking ETF (KRE) broke through a critical price level ($50) yesterday, and is now causing traders to panic.

“Panic” is contagious, especially in a market that is operating in “greed” mode.

My remedy is to remain short the regional banks and to take profits in the broader market ahead of what is likely to be a “sell the news” earnings season.


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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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