For investors trying to predict when bank stocks could be due for a crash, the traditional rules of the road may no longer apply.
Long-standing correlations for bank stocks, such as their inverse relationship with energy stocks, have disappeared during the broad market rally of the past two years.
Investors who had relied mostly on sector analysis are becoming more attentive to strategic changes at individual companies as they decide where to put their money. And that puts the onus on banks to distinguish themselves from the pack.
"You can look at lots of technicals, but longer-term earnings stability is the strongest factor" in picking stocks, said Michael Mayo, banking analyst of Credit Suisse First Boston.
In the past, some investors might have bought bank stocks on news that oil prices were falling and sold them when oil prices rose.
When oil companies suffered, they turned to banks for financing, which bolstered banks' corporate finance business. But higher oil prices generated inflation concerns that drove up bond yields-putting a damper on rate-sensitive bank stocks.
Predictably, when domestic oil stocks appreciated 3% in 1990, bank stocks plunged 31%, according to J.P. Morgan & Co. In 1991, oil stocks fell 14%, while banks gained 48%.
But now, with the banking industry undergoing dynamic growth in a healthy economy, the usual logic about banks and oil stocks no longer applies.
"Oil stocks are matching the market, and bank stocks are running twice as fast," said Douglas Cliggott, Morgan's U.S. equity strategist. In the last three months, domestic oil stocks have risen 24%, while bank stocks are up 54%.
Now, news about individual companies has become more important than news about other sectors. A big merger-related announcement, like H.F. Ahmanson's hostile bid for Great Western Financial Corp., drives up stock prices across the board. And a company's collapse may dampen shares of all its peers, as happened when Mercury Finance Co. had to restate its earnings last month.
"A lot of financials are narrowing their business focus, and it's having a sectorwide impact," Mr. Cliggott said. "Companies raise their earnings growth rates by more carefully concentrating on areas that give them a competitive advantage."
Don Hays, market strategist at Wheat First Butcher Singer agreed that sector comparisons are no longer as useful as they once were.
For banks, "there's an upward adjustment in valuation because of their improved earnings outlook and an improved operating environment," Mr. Hays said.