By Jim Donnelly, Olson Global Markets
Amid rising interest rates, the Keefe, Bruyette & Woods U.S. Bank Index (BKX) is now testing key trend line resistance at 67.11 on long-term charts. Another technical factor to consider is that overbought conditions are now present on long-term charts as well. At the very least, this set-up suggests that either a pause or a correction may unfold over the short-to-intermediate term in bank stocks.
Clearly, the prospect for the much-anticipated taper has given investors reason for pause. Adding to the likelihood that a more defensive posture in equities (in general) is developing, is recent evidence of a slowdown in retail sales, despite a modestly improving employment picture. The criticism of recent job additions, however, is that they have been largely part-timers at relatively low wages. The July BLS report revealed that the biggest jump in job gains last month was in the category of those who are 25 years and older who had less than high school diploma. Further, the BLS also reported that average working hours declined in the private sector from 35.5 hours to 35.4 hours with average overtime hours declining to 3.2 hours from 3.4 hours in June.
These numbers poke a hole in the theory that a jump in the number of part time workers is a prelude to future full time job gains and that existing workers will generally garner an increase in overtime hours before employers make additional hiring plans. Adding to this murky mix was a decline in average weekly earnings from $678.72 in June to $676.70 in July.
Along with the clear retrenchment in retail sales (along with future guidance), this set of statistics may be just enough to put the taper talk on the back burner for a while or until evidence of a more sustainable jobs picture reemerges.
While the continuation of QE at the $85B level could be helpful to lift overall economic conditions in future months, the BKX bank stock index might respond better to an increase in higher quality employment gains along with credible evidence of an increase in economic activity. In any event, keep on eye on the 67.11 level on the Keefe, Bruyette & Woods U.S. Bank Index (BKX). It will likely be a key inflection point that will signal the direction of bank stocks.