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Banks Underperfroming Broader Market

One of the standards that is important to watch to know whether the market has in fact bottomed or not is how the banking industry is performing compared to the broader market. We have never had a bull market in stocks without the bank index at least performing in line with the broader market.

In a market like we have now where the banks led the broader market down, what we want to see is six weeks of positive out-performance by the banks compared to the S&P 500. When that occurs, we will have a level of confidence that the correction has found a bottom and that the market is on a a generally upward trajectory.

How does that impact our timing model? Great question: the timing model is telling us that currently we have a market where we can buy the strongest ideas on pullbacks, but it doesn't give us any indication whether or not we are simply going into a trading range. It is highly probable that the broader market will be in a trading range for the short to intermediate term until we see the bank stocks start to perform positively.

The chart above shows the relationships of the bank index to the S&P 500. It is pretty easy to see that banks are under performing given the downward trajectory of the line.

Banks will be a screaming buy at some point, but finding that absolute bottom will be nearly impossible. We will be using selloffs and continued under performance to build positions in some of the strongest banks and financial companies because when the turn around finally comes, it should be swift and vertical on the chart.