Have Regional Bank Struggles Got People Buying Drugs?
Group rotation is at it again!
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Note: Thursday is Yom Kippur, a holiday I observe, so my next column will be Monday, October 6th. For those who observe, have an easy fast.
As a long-suffering fan of the drug stocks, I was quite pleased to see them rally these last two days. The rotation out of them in September was dreadful and relentless. My sense on the move the last two days is that there must have been an awful lot of folks who were using them as shorts, believing even if they rallied, they would not go far.
So much of what we saw was likely short covering. Not that I am complaining–and Bob Prechter always said every rally starts with short covering—but the movement did not feel like ‘get me in’ but rather ‘get me out (of shorts).’
One reason I think it was short covering is if you look at the drugs that were up already (Teva and Gilead come to mind), you can see they have not rallied much in the last two days. It was the down-and-out ones that rallied hard.
But this is exactly what I mean by group rotation. The chart of XLV has rallied right back to resistance. I have said that I thought it was basing because if you had put your hand over the left side of the chart, you can imagine by the time 2026 rolls around, that will fall off a one-year chart and will therefore look like a big base. So yes, I still like drugs, but no, I am not chasing them here. There is a target in the 150-155 area.
Before we move on to yet another rotational group, let me note that I still think sentiment is complacent, not giddy, but boy, I haven’t heard folks sound that giddy in quite some time. All it took was a big move in drugs. Maybe I wasn’t the only one tired of AI. Who knew?
But we need to go back to the banks, specifically the regional banks. They haven’t broken, but they have been awfully droopy. Two weeks ago, when KRE fell to this area, I said I thought we should see a bounce. But I also noted that the key was that it needed to make a new high. It did not. Now it finds itself back at the line. If this line doesn’t hold, it’s not the end of the world, but then the blue line comes into play, but it leaves resistance overhead. I suspect we see that blue line tagged over the next few weeks.
I have shown you several different financial groups over the last few weeks that have gone out of favor, and now the banks are struggling. That is the group rotation. And I think the brokers/investment banks are probably overdue for a correction as well.
