Morning Notes — BKX Close to Signal Breakout

Skeptical: ‘Skepticism’ is based on an apparent disconnect between presently weak economic conditions and the recent performance in equity markets. These two things are always disconnected as present market conditions reflect market expectations ~6-9 months forward. The apparent stark difference now relates to the magnitude of the lockdown shock against a future that includes a massive liquidity boom. Skepticism is not the same as ‘extreme’ bearish sentiment that serves as a contrarian buy signal…it’s more like a byproduct. Investor sentiment as measured by the CBOE equity put/call ratio and AAII survey is no longer at bearish extremes, but does remain ‘elevated.’ And while elevated bearish sentiment doesn’t provide us with a contrarian buy signal, we think ongoing skepticism is enough to keep the pain trade aimed higher.

Internist: The recent stabilization of cyclical/value sectors over the past three weeks has only added conviction around the sustainability/durability of the broad market rally. But the relative strength from these groups is very close to signaling a powerful macro recovery ahead. Financials are probably our best sector proxy as banks benefit from future inflation through higher Net Interest Margins (NIMs). And the KBE Bank Index (BKX) looks like it could send that signal very soon…maybe today.