It has been a long time since banks were among the market's leading groups. And while the broad market is trading near all-time highs, the SPDR S&P Bank ETF (NYSE: KBE ) , which tracks regional banks, has barely recovered half of what it lost during the financial crisis. It is truly a forsaken group.
Or at least it was.
For the first time in a year, the relative performance of banks versus the S&P 500 has turned positive. And on an absolute basis, KBE is on the verge of a major upside breakout from a sideways pattern that has trapped it since late 2013.
Breakouts in both relative and absolute terms signify a positive shift for any sector and tell us that the group is now one of the strongest in a rising market. Most investment pros would tell us that finding the strongest sectors is the best starting point for selecting the best stocks to buy.
To be sure, the market as a whole is still working out some issues and has yet to make a clean break to the next level. But the bias in the overall market is still to the upside, and so is the trend in market breadth. Pervasive chatter about bubbles and "selling in May" add a nice sentiment twist, telling contrarians to stay the bullish course.
KBE spent most of 2015 to date in a rising short-term trend. It has also remained stubbornly close to resistance since March, refusing to pull back to the bottom of its range as it had done many times in the past. This is bullish behavior. It signals bulls are jumping in on any dip to buy and bears cannot force the issue as they did before.
Even in the midst of a trading range that has been in effect this long, moving averages are all lined up for the bulls.
Normally, moving averages are not very helpful during flat periods, and prices have moved above and below major averages often over the past year. If each was taken as a buy or sell signal, the resultant whipsaws would have been deadly.
But when we look at several averages as a group, we see positive things. Price and moving averages are in proper order for a rally.
The share price is above short-term averages, which are above intermediate-term averages, which are in turn above long-term averages. This is exactly what we want to see, trading range or no.
I have to admit that volume indicators are not as strong as I'd like them to be. Specifically, cumulative volume, which keeps a running total of volume on up days minus volume on down days, has been a bit volatile. And, lately, it has been flat instead of rising. But this is not a deal breaker.
To err on the side of caution, though, I want to let KBE make a definitive breakout above its 2015 high of $34.43, which is also above the resistance level drawn on the charts at $34.25. This will show that the stand-off inherent in a trading range has turned to bullishness in thinking and in action.
Recommended Trade Setup:
-- Buy KBE on a close above $34.43
-- Set stop-loss at $32.50
-- Set initial price target at $38.25 for a potential 11% gain in 10 weeks
This article was originally published on ProfitableTrading.com: Formerly Forsaken Sector Could be the Best Place to Put Your Money Now
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
