The covid-19 crisis seems to have significantly affected the European banks, right? Is it time to face recuperation? Let’s take a look at the STOXX Banks index (SX7E) to try to answer the question.
The problem is not the Covid-19 crash
After Covid-19, many investors are looking for opportunities to buy, especially after the nice recuperation we are experiencing. From its trough around 48.10 where banks seem to have a support, they have risen to 70.45 at the moment we are writing these lines. This means a rise of more than 45 percent, enough to bring attention from investors.
However, things do not look good at all. The bank index is in a clear downtrend. It collapsed with the 2008 crisis, and has not recovered since then. From March 2009 to September of the same year, it recovered fast and did a top around level 240.
After that, you can imagine, we are taking a down movement from 240 to 48.10 in the last eleven years; and now that things do not seem so bad, we are still talking about a drop of about 70 percent.
Is it now the time to buy? Maybe we are facing a once in a life time opportunity, but the same can be said when you miss the opportunity of buying a lottery ticket. If you buy now and it starts to rise, it would be a great operation, but what are the chances?
Right now, the trend is very negative for the SX7E index, and we do not know how things will evolve in some months when the economic effects of the Covid crisis develops themselves.
What are the levels to be aware of?
There is an important resistance between 80 and 85. Should the index price surpass it, 100 and 115 are the next objectives. However, while being in a downtrend, we should look more down than up.
The support is the trough done in 48.10. If this level is broken, we can expect another down movement. If this happens, the index will not have more supports, meaning that it can go down freely.
Conclusion
Banks may be showing a once in a life time opportunity, but the chances of make a losing trade are too big for us. If someone wants to try their luck, they need to set a stop loss shorter than the reasonable benefit to get. So if the price gets close to the minimum, it could make sense to try a very small buy with the stop under 48.10.
Not for us anyway. Banks have been dropping 11 or 12 years, and forecasting now that this big trend is over is more magic than investment.
*This article is just an opinion, and it is not any kind of investment advice. Please ask your financial advisor if you need help.