The Stock: Royal Bank of Canada
Recent price: $50.91
Trend: Canadian banks are advertised as relatively pristine compared to many of their global counterparts, but the market is starting to show that all is not so well ahead for even the best of the banking stocks. The stocks of Canada's largest banks are showing the growing weakness of equity markets and tipping toward a return of a bear market. The performance of financials in the second quarter, down 12 per cent, has taken the sector to a worrisome Stock Trends Weak Bullish category as the group dips below trend line support and threatens to broaden bearish sentiment among investors.
Three summers ago, the financial sector was Stock Trends Weak Bullish before turning Bearish and was on the precipice of a prolonged collapse. The crisis that followed in the latter stages of 2008 proved to be inevitable yet was devoutly rejected as such by many market devotees in July, 2007. Last year's robust market recovery from the darkest days of the financial meltdown delivered bank stocks safely back in the hands of market timers, as well as tidy, conservative investors.
However, winds of worry have now put the financials in a new bearish tilt along with much of the stock market. This important sector has been underperforming the broad market since early June, although not as significantly and prominently as the mining sector, and provides an important cue for investors anxious about equity holdings.
The Trade: Royal Bank of Canada looks to become the first of the big five Canadian banks to trigger a Stock Trends Bearish indicator, its stock falling below trend line support at the end of May and sliding another 8 per cent since. Last week's share price drop below $52 spells another worrisome moment for shareholders and suggests further declines ahead.
With the exceptions of significant bearish trends in the periods from the third quarter of 1998 to the second quarter of 2000, through the middle quarters of 2004, and the more recent bear trek that mired this and other bank stocks from the third quarter of 2007 to the second quarter of 2009, Royal Bank shares have largely been in Stock Trends Bullish category for the past 15 years. Although there have been some minor trend shifts that would scar the record, a change of category to Stock Trends Bearish should not be taken lightly.
The stock's relative performance recently points to inherent technical weakness - it has underperformed the S&P/TSX composite index for six of the past nine weeks. Last week's share price fell only 4 per cent compared to the 4.4 per cent drop in the composite index - one of the few weeks it held a better relative performance, but hardly something to sing about.
Although some analysts remain positive about the stocks of Royal Bank and its peers, the balance of the market seems much less enthusiastic. Bearish market timers are taking a withdrawal, selling this and other bank stocks.
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The Upside: The Toronto market dances with the performance of commodity stocks, but the financial sector is a good barometer of the health of the broad market. As these stocks slide past levels of price support, the prospect of bearish sentiment pushing Royal Bank shares down another 10 to 15 per cent through the latter half of the year hangs as a likely outcome.
The Downside: The stock could rally to the $57 level in the short term to form a familiar head-and-shoulders pattern on its weekly stock chart. That would put a wrench in the plans of investors exiting now, but offers another favourable exit point.