Bank Stocks...Sold To You?

JC Parets
July 28, 2020

Banks are the most important sector of the market so their performance, or lack thereof, gets our attention.

This week we're seeing some interesting headlines about industry heavyweights HDFC Bank and ICICI Bank.

Let's take a look at what's happening.

First, let's start with HDFC Bank, which continues to struggle with the 1,100 level of resistance on the daily and weekly chart. Notice how momentum also failed to reach overbought territory throughout its entire March-Present rally? Not exactly bullish action.

Click on chart to enlarge view. 

And here are some of the headlines we're seeing about the stock this week. Sold...to you?

On a relative basis, it's clear that HDFC Bank is still one of the best-performing stocks relative to Bank Nifty, but relative to the Nifty 50 it's broken a 12-year uptrend and is beginning to roll over. The largest stock in the sector underperforming the broader market is a headwind for Bank Stocks, and therefore, Equities as an asset class.

ICICI Bank was one of our key stocks to watch this week as it reported earnings over the weekend. Well, market participants were sellers of the stock the last two days, confirming a failed breakout above the 38.2% Fibonacci Retracement of its 2020 decline. Also, notice here that momentum failed to reach overbought territory at any point since March? Sellers are still clearly in control here.

And from a sentiment perspective, the entire analyst community is on one side of the boat. This tweet got my attention...

If every analyst loves the stock, who is left to buy? And why has the stock underperformed both the Nifty 50 and Bank Nifty Indexes so badly for more than a decade? Neither of these charts inspires confidence that the stock will turn it around and become a long-term outperformer.

HDFC Bank is 28% and ICICI Bank is 19% of the Bank Nifty Index, making up a combined 47% of the entire sector. Until these stocks break above resistance on an absolute basis and begin to trend higher relative to the Nifty 50, it's likely Bank Nifty will continue to struggle on an absolute and relative basis.

Here's the Bank Nifty chart we've been using as our roadmap. The wide, messy range remains 23,700 on the upside and 17,575 on the downside. The fact that prices are still above their 2015-2016 highs near 20,350-20,750 is a positive, but we really need to see a breakout above 23,700 to confirm further upside potential.

And relative to the Nifty 100, Bank Nifty is retesting the key level we've been watching as part of our "Five Bull Market Barometers" list. Banks underperforming is a headwind for stocks, so market bulls want to see a successful retest of support followed by a sustained move higher.

The Banking sector is extremely important from an Equity-market perspective. Banks struggling is a major headwind for stocks as an asset class given their large weighting in the index and remains one of the biggest risks we're watching.

Until its two largest components, HDFC Bank and ICICI Bank can break above resistance on an absolute basis, Bank Nifty is likely to continue struggling. And the fact that the analyst community loves these stocks, but they can't seem to sustain a rally speaks volumes about the selling pressure that remains in these stocks.

There are pockets of the Financial Services and Bank Nifty sector that we're taking advantage of on the long side, but the best opportunities remain in other sector/industry groups for the time being.

For the sake of the broader market, we want to see that change...and soon.

Also, make sure to check out our "Trade of The Week", "Three Charts For The Week Ahead", and our weekend post on Reliance if you haven't already.

Thanks for reading and please let us know if you have any questions.

Allstarcharts Team

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