[Chart Of The Week] The Bullish Case For The U.S. Stock Market

JC Parets
April 15, 2016

I think a really important concept that too often gets overlooked is the power of keeping an open mind. Why must we stick to a bearish or bullish stance? What is wrong with neutral sometimes? Just because our upside get hit, does that mean we need to flip bearish and start shorting everything? I don't think so. I much prefer taking profits when objectives get achieved and then reevaluating once we get more price data. We don't know what is going to happen tomorrow or next week or next month. No one does. So let's appreciate the fact that the future is unknown and therefore all possibilities should be considered.

Today's Chart of the Week represents what I consider to be part of the bullish case for the S&P500 in 2016. I'm not ready to pound the table bullish, or bearish for that matter, but if this one plays out the way it looks, I would argue that it's a giant feather in the hat for the bulls. This is the mystery chart that I tweeted out yesterday, for those of you who have been asking.

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Here is a chart of the KBW Bank Index vs the S&P500. In other words, banks relative to the rest of the market. The reason I bring this up is because do you know how many bull markets we've seen for U.S. Stocks without the participation of the banks? Zero. For the market to have a sustainable move higher, banks need to show up to the party.

The bullish case for the U.S. Stock Market starts with this chart. Relative to the overall market, Banks made new lows this month, but that new low was accompanied by a much higher low in momentum, and swift recovery back above those former lows from February. I believe this can definitely be the catalyst to take banks higher, particularly relative to the rest of the market:

bkx spx

All we're looking for is a mean reversion. The mean is currently well above current levels and would take us all the way back to the October lows. The market can do an awful lot of damage to the bear case between now and then.

We are looking specifically at the Bank Index because it focuses more on actual banks, as opposed to the popular S&P Financial Sector Index that includes a lot of Real Estate Investment Trusts (REITs) in its top holdings. Here is the breakdown if you're interested so you can see the major differences between the two:

4-15-2016 3-55-31 PM xlf vs bkx

The Bull case for U.S. Stocks begins with this chart above folks. If we see further upside similar to what we've just seen over the past week or so, the S&P500 isn't going lower. You can follow along using the ticker for the Index $BKX, or there is a Powershares ETF you can trade $KBWB that tracks the index itself.

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Tags: $XLF $KRE $BKX $EUFN $KBWB

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