BofA: Time To Sell Your Bank Stocks

Bank stocks have undoubtedly been one of the leaders in the latest stock market rally.

The chart below, normalized to 100 at November 15 prices (the starting point), shows how bank stocks have outperformed. The red line is the KBW Banks Index (ticker symbol: BKX) and the blue line is the S&P 500.

After a bit of a pullback, the KBW Banks Index surged to new highs in the last few weeks of 2013.

On the back of this rally, BofA analysts Erika Penala and Mary Ann Bartels say now might be the time for those invested in the banks to sell.

In a note to clients – titled "Are banks at a near-term top?" – the analysts write, "While bank stocks clearly face technical resistance, we find little in the way of fundamental support for continued outperformance."

The chart below shows the technical resistance BofA is talking about. The $55-65 range used to be a "support" level for the index, back in the late 1990s and early 2000s. In the wake of the financial crisis and stock market crash, however, that same range has now become a resistance level.

Penala and Bartels write (emphasis added):

While bank stocks clearly face technical resistance, we find little in the way of fundamental support for continued outperformance (YTD BofAML’s bank coverage universe is up 12.3% vs. 8.7% for S&P) and would use this rally as an opportunity to lighten up on select regional bank exposure ahead of earnings.

We believe 1Q results are unlikely to provide many upside surprises as loan growth trends point to more than seasonal weakness (1Q13 loan balances +0% YTD vs. +1.6% at this point in 1Q12) and NIM pressure serves as a reminder that spread income at banks is far more reliant on movements in short rates vs. long rates. In this light, we continue to prefer C and JPM as our top picks in our universe.

If the banks cool off, it could be bad news for the broader market as well.