Wells Fargo shares sailed up 31.7% last Friday on the strength of unexpectedly good profit numbers, which were ascribed principally to strong business in new mortgages. Other banking issues basked in the reflected glory and gained ground as well.

Upon brief examination of the performance of the Dow Industrials on Friday, one factor fairly leaps off the charts: whereas banking issues did well, by and large the shares of companies which make tangible products which people use every day barely moved – for example, Johnson & Johnson, Kraft, Procter & Gamble, Exxon Mobil, and Coca-Cola. Johnson & Johnson and Merck were actually down a notch. Perhaps most tellingly, Wal-Mart gapped way down on opening, the gap held all day, and Wal-Mart shares closed 3.8% lower.

What might Yogi make of it? Is this “déjà vu all over again?” Are investors once again chasing stocks of financial companies which create no products of tangible value, while stocks of companies which make brand-name household staples which we use every day get hardly any play at all – and while the shares of the largest retailer in the country gap down, stay down, and close lower? If bank shares are becoming stylish again, one wonders whether this is getting close to the heady old days of financial magic, and whether this narrow little boom may not have staying power in terms of general performance of the market in the days to come.

I made note of this in my newsletter yesterday. This morning, a financial writer in another publication makes pretty much the same observation, part of his story headline being “U.S. Banks Will Make or Break the Stock Market Rally.”

Let’s take a look at the Candlestick pattern of Wells Fargo shares’ price action last Friday. Prices gapped up $4.95 on opening, and the gap held all day. This is the beginning of an “Island Top.” Most importantly, the price bar of the entire day’s action is a classic Candlestick “Hanging Man” formation, which has bearish implications but requires a lower closing today for confirmation. It’s a warning signal.

There’s no way to tell, this early in the morning before the market has even opened, whether Wells shares will close lower today. But if they do, we had better be aware that the bear is lurking.

William Kurtz
http://www.candlesticksonsteroids.com