Some of the strongest performers in the past 3 months have been U.S. bank stocks. It’s not a coincidence that charts of the large cap banks all look very similar since the same dynamics affect them all.  The most significant catalyst for their recent strong advance is the signal from the new Administration that regulatory red tape will be rolled back including a promise to repeal Dodd Frank and the potential for a friendly lending environment.

We will consider the chart of Morgan Stanley, MS, but it could be any of the big money center banks since all of their charts look similar.

The above long term monthly chart shows how strong bank performance has been, in particular since the general election last November.  Prices have cleared previous resistance areas and are substantially above the 50 and 200 period moving averages.  SCTR rankings are high and RSI confirms the recent advance.

If we toggle down to look at the weekly time frame, things look a bit more unsettled.

Now we can see some momentum divergences at play as shown by the divergent purple arrows above.  In particular, RSI and volume prints are not going in the same direction as price. As noted on numerous posts, divergences can go for long periods of time until they are resolved, so this is a warning, not a signal.  But when we also consider the distance of price above the moving averages, the risk/reward calculus is not in favor of continued holding of MS and certainly not adding to positions.

chart by Interactive Brokers

Pictured above is the daily chart of MS displayed with another technical study which more definitively shows the divergence in momentum on the last surge to new highs. This appears to be the end of a 5 wave pattern of some degree and accordingly, we expect that upside potential is very limited here.  We do note that SCTR ratings are very high so for now,  an expectation of a sharp selloff is not expected.  More likely we will see rotation into other sectors.