Banking sector vol & reversals

May 12, 2018 12:00 PM

Quant Cycles is a technical tool that employs proprietary statistical techniques and complex algorithms to filter multiple cycles from historical data, combines them to obtain cyclical information from price data and then gives a graphical representation of their productive behavior. Other proprietary frequency domain techniques then are employed to obtain the cycles embedded in the price.


Citigroup (C) rallied nearly continuously from mid-2016 up until this February. After recovering much of the ground from the late January early February sell-off, Citigroup turned down again in mid-March pushing it close to oversold territory based on Quant Cycle analytics just as the cycle is expecting to turn higher. This presents a solid buying opportunity this spring. But don’t wait too long as the Quant Cycle anticipates Citi peaking in early June and entering a significant bearish pattern that will last into September and take it well below its current levels. Two solid trades here, followed by a significant low in the fall. 


JPMorgan (JPM) has a similar if a slightly more impressive equity curve as Citi during the last two years. The recent weakness has moved JPMorgan stock into definitive oversold territory based on its Quant Cycle reading. However, the Quant Cycle forward guidance is not as strong as with Citi. The cycle expects JPM to enter a slow steady downtrend for closing prices for the rest of 2018. Given the bank’s current oversold position, it would be best to wait for JPM to see some rebound from its current level before going short. 


The KBW Nasdaq Bank Index (BKX) has dropped 10% since setting a double-top in early March. Its Quant Cycle projection is remarkably similar to that of Citigroup. The BKX, however, has touched oversold territory and its Quant Cycle projection has already turned up. It is a solid buy at the low $100-level, but is expected to turn lower near the end of May. Unless you can go long at a price, it would be best to wait for an upward correction to short somewhere above $110. Like Citi, KBW will provide a solid buying opportunity in the fall. 


Wells Fargo (WFC) began selling off with the rest of the market and banking sector in late January, but never recovered. WFC is down more than 20% from its late January peak, but unlike Citi or the BKX, no respite is in sight. While WFC is in solidly oversold territory, its Quant Cycle indicator has it continuing to weaken well into June. Given its oversold reading, you may wish to see some improvement before shorting, or simply wait for a bottom in mid-June, when its Quant Cycle reading has the stock turning higher. Given the Quant Cycle divergence from the rest of the sector, traders may wish to employ a spread, shorting WFC versus the broader sector index or another banking stock. 


For close to a year, the Quant Cycle has been forecasting weakness in equities in general and the Dow Jones Index in particular. Every time that it looked like the market may be turning lower, it reversed and made new highs. That is up until recently. We included a longer-term Quant Cycle for the Dow and though it appears slightly oversold with the recent weakness, the Quant Cycle has the Dow in a downward cycle for another 12 months. It doesn’t expect the Dow to make a bottom until the spring or summer of 2019. If this projection is correct, traders should change their outlook from looking for sell-offs to go long to looking for rebounds to short. 


Since the massive sell-off in bonds (rally in yields) in the second half of 2016 that took the 30-year Treasury bond yield above 3%, yields in the long bond have been straddling the 3% level. The recent rally in yields looks to be near a top based on Quant Cycle analytics. While many analysts think that the 35-year bull market in bonds is near an end or perhaps has ended, especially with the recent tightening by the Federal Reserve, the Quant Cycle expects yields to dip back below 3% and continue to slide well into the summer. If the Quant Cycle analysis of the Dow is accurate, this movement would make sense. In fact, it can be seen as somewhat of a confirmation of it.  

About the Author

John Rawlins is a former member of the CBOT with more than 30 years of experience in trading and research. He co-developed the Cycle Projection Oscillator, which has been featured in Futures and numerous research reports, with an aerospace engineer to identify the dominant cycles in a data stream and project them into the future. Reach John at @cpopro1. You can reach John at