ETFs tied to the U.S. banking sector are trying to climb above a key resistance level that has been in place since 2010. A breakout in this important sector would be a positive sign for the overall stock market.
In the third quarter, banks booked their best profits in six years as earnings rose nearly 7% from the year-ago quarter, according to a report this week from the Federal Deposit Insurance Corp.
“For the first time in three years, banks are getting a larger boost to their profit from traditional sources of revenue than from simply cutting back on funds set aside for bad loans,” WSJ.com reports.
To boost their profits further, banks are “going to have to figure out ways to earn more on their loans or look to alternative sources of revenue,” said SNL Financial analyst Tyler Hall in the article.
Banking ETFs are slightly outperforming the market in 2012. SPDR S&P Bank ETF (NYSEArca: KBE) is up 17.3% year to date, versus a 14.2% gain for iShares Core S&P 500 ETF (NYSEArca: IVV), according to Morningstar.
Despite improving bank earnings, the European debt crisis and the U.S. fiscal cliff remain key risks for the sector.
“In the short run, investors are loath to purchase stocks threatened by political, regulatory, or legal attacks. Regulatory uncertainty and macroeconomic fears are unlikely to lift anytime soon. In the end, investing in the financials sector requires a strong tolerance for risk and nerves of steel,” says Morningstar ETF analyst Timothy Strauts in a report on KBE.
Banking ETFs remain well below their 2007 peak from before the subprime meltdown.
Following a post-financial crisis rally into early 2010, banking stocks as measured by the KBW Bank Index have traded in a narrowing range with a slight downward bias, according to chartoftheday.com.
“Since late 2011, however, the trend has been up,” it added. “With banking stocks having recently pulled back from resistance and currently testing support, this all-important sector is fast approaching a critical decision point.”
PowerShares KBW Bank (NYSEArca: KBWB) tracks the referenced index.
J.C. Parets at All Star Charts notes the long-term bank chart “shows us that a major directional decision is about to be made in a very important space for the U.S. equities market.”
“The question we need to ask ourselves is whether the breakout will occur to the upside, or if prices rollover and breakdown as it approaches the apex of this pattern,” he wrote. “I have a feeling that the decisive move will be the beginning of a much larger directional trend.”