The rally is slowing down, and with good reason.
Last week the rally was based on financials, industrials, materials and health care. But one by one, sector leaders have wilted. Now, banks are one of the few leadership groups left.
The bank ETF KBE, a basket of big bank stocks, is up a phenomenal 14.8 percent since the election. All the big names are at 52-week highs.
It's going to be tougher to get those kinds of gains from here.
It's not that I have a crystal ball. I'm just using simple statistics.
The S&P financial sector is trading almost 20 percent above its 200-day moving average, a more than four-standard deviation move, according to Paul Hickey at Bespoke.
To give you an idea of how rare this is, a four-standard deviation move means that it will move outside that range once in more than 15,000 times. Think how rare that is. According to Hickey, it hasn't happened since 1989, and that's when record-keeping for this kind of stuff began!
What it means is that under the laws of mean regression, an extreme measurement such as this will tend to move toward its long-term average fairly soon.
In other words, it's statistically unlikely — highly unlikely — that bank stocks will keep rising.
But there are other, more fundamental, reasons why the bank euphoria may have run its course, at least without a lot more information.
Banks have been going up for three reasons:
1) Regulatory reform. There's something to this, but it's not clear how much of Dodd-Frank will be dismantled, and at any rate this would only benefit the biggest money-center banks, which certainly remain out of favor even with the mainstream Republicans who will likely be running the Trump administration. We simply need a lot more specifics.
Here's Adam Parker, equity strategist for Morgan Stanley:
"Clearly less regulation is a positive, but given the financials have moved way more than just interest rates alone would indicate they should have, we think some regulatory relief has begun to be priced in."
2) A steeper yield curve around stronger growth will certainly benefit banks, but we have no idea how steep the yield curve will be, and remember the Fed is the primary player here.
It's true interest rates have also moved on the perception that an infrastructure program will result in massive borrowing that will depress bond prices.
Again, here's Morgan Stanley: "We are not sure how much of the back-up in the long end of the interest curve — based on expected supply to fund an infrastructure program — will come to fruition (i.e., will there be as little gridlock as some investors think and how will it all be funded, public or private, if there is an agreement) and further, there is even more uncertainty about the Fed's path."
3) Corporate income tax reform. It would make sense that banks would be among the beneficiaries of tax reform, but there's not a lot of data to analyze how much would go to their bottom line.
Morgan Stanley noted that the last large move lower in corporate taxes was in 1986, when the rate went from 45 percent to 34 percent. In 1993 the rate went from 34 percent to 35 percent.
Finally, there's plenty of near-term events that could trigger more squeamishness on banks. The two obvious ones are the upcoming Italian referendum and the Federal Reserve meeting, both only a few weeks away.
Add it all up, and you get exactly what Guggenheim advised clients Monday:
"We believe valuations are now discounting stronger growth, higher rates, a steeper curve, and/or a less challenging regulatory environment, and causing the stocks to approach the top end of our fair value range."