Underneath the surface of a bubbling and vibrant U.S. stock market is a banking industry scandal waiting to erupt. And while there can be no denying the bullish tenor and strong technical picture of most sectors of the equities market, a conspicuous distribution campaign appears to be underway in the leading bank stocks.
Naturally, the resumption of the bullish trend in the broad market makes for the perfect background to mask the selling activity underway in these major banking stocks. Although there is always room for debate when it comes to reading the tape of individual stocks without the benefit of actual upside/downside volume figures (which does not exist for individual securities). Thus, it takes considerable facility to "read between the tape" and accurately interpret the everyday price-to-volume fluctuations of listed stocks. We do not claim to be the ultimate authority on tape reading but our experience in this scientific art has led us to conclude that something is very amiss in our country's banking structure.
Before we lay out our evidence, we must provide a little background for making our bold statement that some sort of trouble lies ahead for the banking sector. The underlying assumption behind tape reading (i.e., interpreting daily and hourly price and volume fluctuations of listed securities) is that "the tape tells all," a reference to the prescience of the market itself. The speculative markets perform the function of discounting in advance all that is known in the way of information and possibilities that have any effect whatsoever on the future of the stock market and the economy. If a crisis is indeed brewing in some sector of our economy, the market itself (via the price and volume fluctuations) will warn us in advance.
Well, the market-in this case, for banking stocks-is indeed warning us of something in advance, and that something by all indications is negative. What that "something" is remains to be seen and it would be foolish to speculate on the endless possibilities; all we need to know is that something indeed is that trouble is indeed brewing. And make no mistake about it, something very significant is brewing in the banking sector.
What are the indications of this potential bank-related problem? First and foremost, one of the leading bank sector stocks in the country-Citigroup [C:NYSE] has recently seen an extraordinary increase in trading activity. Last Thursday alone, Citigroup witnessed trading volume at five times the daily average-an all-time record for this stock! And according to our reading of the tape, nearly all of that volume was downside volume. Take a look at the intraday five-minute bar chart for Citigroup. Note the huge trading bar that occurred toward the end of the trading session on Thursday and how the closing tick occurred at the extreme low end of the extraordinarily long bar. Note also the magnificent rise in volume on this downside close. This, ladies and gentleman, can only be interpreted as intensive selling by insiders and specialists.
The other banking stocks have acted as "covers" for the distribution clearly underway in Citigroup. The other leading U.S. banking stocks include J.P. Morgan and Chase Manhattan Bank (the leading money center banks), Banc of America and Mellon Bank (major regional banks). While the amount of trading volume in these particular stocks has nowhere near approached unto the level of trade seen in Citigroup, there is still sufficient reason to believe that these stocks, as well, have been participating in the distribution campaign presently underway.
One of the best ways to isolate a trend in a given stock market sector is to average the daily prices and volumes of five of the leading stocks in whatever sector one happens to be analyzing. This concept, which has its basis in a theory articulated by the great stock market technician Richard Wyckoff, is known as "wave charting" based on its ability to capture the essential trend in a given sector (we devote a chapter to this practice in our latest book, Elliott Wave Simplified). When we average the high, low and closing prices along with trading volumes of the above mentioned five banking stocks, we are presented with a chart that is quite instructive. While the chart pattern produced is the silhouette of a bullish "flag" pattern, the volume indications present an entirely different picture. Three very large spikes in volume-all within a space of five days-indicate that insiders have taken profits during the latest "resting" stage after the runup from late last month. Even the bottom to the long decline from this past summer through October was a downside closing on high volume, instead of the upside "key reversal" that normally signals a true bottom is in place. In other words, the recent rally among banking shares appears to be of the manipulated variety.We will know that the distribution is complete when $49 is penetrated in Citibank's stock. Keep your eyes firmly glued to Citibank in the days ahead.
What happens here largely determines whether this scenario we have outlined will come to pass or not. In the event that $55 is broken to the upside on increasing volume, it would nullify our prediction. The bottom line is that it will take a lot of volume flowing back into Citibank's stock to turn the situation around from negative to positive. Short of this conspicuous increase in upside volume, our bearish forecast stands.
So what are the socio-economic implications of this unusual activity taking place within the banking shares? Again, this is purely speculative on our part, but it might have something to do with a money panic on the horizon (Y2K?). This is not to suggest that the bull market in equities is in immediate danger, because by most technical measures it is not. Any distribution in the broad stock market should not begin to be noticed until well into 2000.
And we are likewise not suggesting that Y2K will be a real concern, because most Y2K-sensitive stocks (i.e., technology and Internet stocks) are performing as if the problem did not exist at all. If Y2K were to be half the crisis it is being predicted by some, the stock market would have long ago served its function of discounting this even and providing us with adequate fore-warning. The fact that we are less than two months away from the "main event" and the stock market is largely behaving bullishly leads us to believe that nothing serious will occur when the clock strikes midnight.What we are proposing is that a perceived (emphasis on "perception") crisis in confidence may temporarily roil the banking sector long enough to shake out the "weak hands" and allow the insiders a firmer grip on the monetary machine, possibly allowing them to buy back these banking shares at a considerably discounted price. One thing is certain, the recent spike in gold's price along with the accumulation evident in gold and silver shares (Bill Gates, for one, is rumored to be long in shares of Pan American Silver) is telling us some financially-related event is about to take place. Gold's rally happened for a reason (besides just mere short covering).
But what could this event, or perceived crisis, be? We do not pretend to know. We offer only one bit of information that might yield a clue. According to a news item appearing in a recent edition of the Drudge Report, NBC is planning to run a made-for-television movie on Nov. 21 about a Y2K meltdown involving ATM machines. Wrote Michael Haga, editor of The Economic Outlook: "This is in fact a possible scenario and the movie which airs on Sunday night may trigger bank runs beginning Monday, Nov. 22, 1999." Is the Establishment psychologically preparing the masses for a financial fleecing?
Our advice is to steer clear of the banking sector until things clear up sufficiently to allow for a more bullish outlook. In the meantime, give thought to some of the lower-priced speculative gold and silver issues (many of which look surprisingly attractive right now). And by all means, keep a sufficient supply of physical cash on hand over the next few weeks. With all that is happening in the markets and with all the propaganda the mass media are bombarding us with, you never can be too cautious.
12 November 1999
Clif Droke is editor of the weekly Leading Indicators newsletter, covering the U.S. equities market outlook from a technical perspective as well as the general economic outlook. He is the author of the recently published book, Technical Analysis Simplified. For a free sample issue of Leading Indicators, send name and mailing address to email@example.com or mail to: Leading Indicators, 816 Easely St., #411, Silver Spring, MD 20910.
Also by Clif Droke
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