Seemingly no-brainer may not be so so at moment

Fed has come out of QE and has started to raise interests. The tax cut and Trump's other pro-business policies may likely stimulate the economy, which has at least been widely considered in the business world. The revived economy in the US may start to move muted inflation up, which in turn may further trigger Fed to accelerate the rate hike. Which sector should be the most benefited one in this kind of increasing interest environment? It is almost a no-brainer that the banking industry should be the most beneficial sector. I agree and also believe banking should be doing well in 2018. But is it a no-brainer at the moment to buy bank stocks? I'm not so sure. At least the sector's technical is suggesting to be cautious at least in the near term.


Below is the one year chart for the bank sector index BKX. Following the positive news of the tax cut becoming effective in Dec, BKX has moved up nicely in the month. The problem is that its momentum indicators like MACD and RSI do not show the same positive trend. Rather they are moving down, creating a negative divergence. This kind of negative divergence is often a precursor to a change of the trend direction. You can also see two previous times in the past year how BKX did when a clear negative divergence developed. Each time, it experienced a mini crash in the scale of 5% or more decline before resuming its next leg up. Are we going to see a similar "crash" for the bank sector in the near term? I think it is highly likely! If you are thinking to buy bank stocks, better to hold off for now and you may likely get a much better price in a few weeks from now. Remember, individual stocks may be much more volatile than the index itself and we may see a 10% correction for a bank stock easily if the overall index drops by 5%. Be cautious for this no-brainer!!