BKX (Bank Index) heading for new lows - update

The weekly BKX index, which yesterday was relatively resilient, is still one of the biggest harbinger for new lows overall. Wells Fargo and JPM delayed the sell off. Let's forget about this stupid above or below analysts' expectations game, that is just a distraction from the trend. The losses in the mortgage sector alone accumulated to $6 tril. (including related derivatives), as I calculated and only $600 bil. have been realized yet. That only refers to the CDO complex banks have much more vulnerable areas in their balance 'cheat-sheets' and with a further deterioration (inevitable) losses will add substantially - which need to be reflected in stock prices. For instance, if JPM can hold current quarterly earnings over the next 3 quarters, it would earn 44 cent per share in a year, creating a PE close to 100 - JPM made an incredible profit in investment banking of $882 mil. due to its safe haven status for prime-brokerage and that 3 competitors are gone but that is not sustainable. Hence, the current stock price does not reflect the market risk at all, which is true for most stocks.

Getting back to the technical picture, we are in the final leg of this big wave (which will be followed by another big wave down in 2009 but before a substantial counterwave) - this leg needs 2-3 lower weekly closes beneath 50 basically. As a price pattern, one can mirror the upper part of that pattern to the downside (that is the 3 month long trading between 60 and 80) and you get a price target of 38/40. Some banks are substantially overvalued with JPM and WFC but Wells has still some upside momentum short-term, since people have the irrational urge to buy too expensive into the 'survivor' attitude. BAC and C are the weaker big boys with Citi carrying a wipe-out balance sheet (they are technically bankrupt but definitely too big to fail) and BAC made a lot of stupid acquisitions with the latest ones Countrywide and Merrill adding problems and bought at far too high prices. Both have to go down substantially - more on that in single analysis - but I can only agree to Ms. Whitney, one of the few really good analysts out there, that this $250 bil. is nothing, since we had that already a few months ago by sovereign funds and more rounds will be necessary going forward.