Chart of the week: prospects for UK banks
Will the recent sector rally continue, or is this a harbinger of another bear market to come?
1st June 2020 10:54
by John Burford from interactive investor
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Will the recent sector rally continue, or is this a harbinger of another bear market to come?
Barclays – and the banking sector - in weak rally
We live in an age of extremes. From politics to finance, we are seeing it all. A few months ago, who would have thought it likely for the US government (among others) to be paying a big chunk of the wages of a huge percentage of private sector employees in enforced furlough?
And for these furloughed workers to be earning more than they did when working (the extra bonus)? Clearly, Uncle Sam has switched from a mean voracious tax-gathering monster (the IRS) to a new-found kindly uncle. What an extreme turn-around that is! From Scrooge to Bill Gates in one small step for man.
And who would have seen a goodly number of those furloughed to be opening new online stock trading accounts? Broker Robinhood racked up a record-busting 400,000 in March alone. Remember, these are the most inexperienced investors. They are also desperate to make money – never a good emotional starting point.
Naturally, most of these new traders are flocking into the big tech names and mostly shunning the boring old-fashioned Dow companies. The tech-heavy Nasdaq has regained over 90% of the Corona Crash, while the Dow has only recouped a lowly 50%.
Many are so bullish they are projecting new highs for the Dow – I have seen a 30,000 target in 2021 and 40,000 in 2022 offered by one fund manager. That is a measure of the extreme confidence out there as pandemic lockdowns are being lifted (which in turn lift our spirits).
But are traders/investors being carried away with visions of a forever-backstopped Federal Reserve market with unlimited funds? A healthy economy and stock market is first and foremost marked by a healthy banking sector. Without that, an economic contraction is an accident waiting to happen.
In the UK, I have been following the fortunes of Lloyds Banking Group (LSE:LLOY) and Barclays (LSE:BARC) for some years and have been solidly bearish. I recently updated my Barclays view on 18 May with this chart:
Source: interactive investor. Past performance is not a guide to future performance.
And this is what I wrote:
“My forecast is for a new wave 5 below the wave 3 low at 73p. Then, odds favour a very strong rally phase that should be tradable. I will try to identify the turning points.”
- Chart of the week: Barclays shares could do this next
- UK banks: what City experts think of Lloyds, Barclays, RBS and HSBC
In the two weeks since then, we had one more bounce to 125p on Thursday which met the upper gap. That was a Fib 38% retrace of its Corona Crash – and a weak rally compared with the retrace of 50% in the FTSE 100.
The banking sector is again the weak sister – and forebodes economic contraction ahead, even if lockdown easings go well (a doubtful proposition) and a general decline in the FTSE.
And a new development in the shape of major riots in many US cities is emerging. This is not a manifestation of a confident, satisfied populace, but it is of a growing negative social mood – and a harbinger of another bear market to come.
I maintain my bearish medium and long-term stance.
For more information about Tramline Traders, or to take a three-week free trial, go to www.tramlinetraders.com.
John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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