Monday, February 23, 2009
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report

Have we seen a climactic bottom in the banking sector?

In my last “Sector Watch” column, I alerted you to the KBW Banking Index (^BKX) as a gauge of the banking sector’s performance.

Specifically, I pointed to a potential reversal in the sector, given the way the chart was set up. The index initially did reverse upward in early February, but it proved to be short-lived, as it was unable to trade above its 50-day moving average.

Since then, the banking sector continues to give America nightmares. A huge chunk of stimulus money has already disappeared down a black hole, with seemingly no effect at all. America’s banks are gasping for air. And Europe’s debt-ridden, leveraged-to-the-hilt banking sector might be in even worse shape.

So after the briefest of rallies, it was no surprise to see the selloff quickly resume. In fact, ^BKX closed at its lowest level in more than 16 years last Friday.

And while this headline was obviously the main news, there was, however, a ray of hope…

In trading as low as $19.58, a late-day bank led rally helped ^BKX close more than 10% above its lows. In addition, the volume was very heavy, which may signal a climactic bottom in the sector, at least over the short-term. Only time will tell, but because ^BKX is a leading indictor, it’s worth watching closely.

“Dow Theory” Has Spoken… We’re Heading Lower

As for the overall, longer-term stock market trend, both the Dow Industrials and Dow Transports have now traded below their November lows.

According to “Dow Theory,” this means these indexes should eventually move lower until one of them makes lower lows while the other does not.