Bank stock indexes have consistently rallied after selloffs since April, but each successive peak has been lower than the last. In the parlance of chartists, who look for technical patterns in stock fluctuations over time, bank stocks have recently formed double-tops: a high, followed by a dip, followed by another high.
Two equal peaks suggest resistance to higher prices, the chartists say. But if successive peaks fail to reach their former levels, chartist theory predicts a continuing decline.
For example, a six-month graph of the Philadelphia Keefe Bruyette & Woods bank index, a market-weighted composite of 24 money-centers and leading regional banks, resembles a mountain range with successively smaller peaks.
The index reached its acme of the year on April 27, at 934.81. It then lost more than 110 points by late May, creating a trough before it gained upward momentum in mid-June, rising to 910.73 on July 6.
That was another peak, though lower than April's. The index repeated the pattern, dipping more than 120 points by mid-August, then surging to a yet lower peak of 874.39 on Aug. 24.
Other bank indexes have had similar paths, including the Standard & Poor's bank stock index of 31 money-centers and regionals, and the Nasdaq bank stock index of 721 companies.
To John A. Mendelson, an analyst for Schwab Capital Markets and Trading Group in Jersey City, that spells enough of a negative trading pattern to prompt investors with a six- to nine-month time frame to reexamine the financial companies in their portfolios.
"Most people roughly familiar with charts would say, 'Gee, that doesn't look good'," Mr. Mendelson said. "That is at least a concern to look at fundamentals" of individual stocks.
Mr. Mendelson says he is not a chartist who makes investment decisions only on the basis of what the charts show.
He says looking at a bank's fundamentals is important, but also says charts show trends, and those trends can be warning signs.
Mr. Mendelson is not calling for investors to dump bank stocks but to look at each stock's fundamentals to decide whether or not to hold it. He says that when an index shows repeated resistance to a price point, "people perceive the group as expensive."
He stresses that his outlook is only for periods of six to nine months, and is not designed for longer-term analysis.
Some individual banks are mimicking the Philadelphia index. Citigroup Inc., for example, peaked this year at $50.875 on April 29, then dipped to $41.625 on June 2. That was followed by another peak on July 19 of $49.188, and another trough at $42.25 on Aug. 10. Its latest peak of $49 was on Aug. 24 and Aug. 25.
Most other banks have hit similar price resistance points, including Bank of America Corp., J.P. Morgan & Co., and Chase Manhattan Corp.
Mr. Mendelson noted that the performance of bank stocks is much like that of drug company stocks, which went through a similar pattern earlier this year and have performed poorly, with many institutional investors selling off.
Banks, whose stocks are widely owned, like drug companies, might be in for a similar fate, Mr. Mendelson said.
"Charts can be useful as an early warning device," Mr. Mendelson said. "If you look at the whole thing, it helps to give you a rough feeling for the whole area."