Is The BKX Topping Out?

The BKX (the Bank Index) is showing some signs of topping out at the 105-106 level. This may have significant ramifications, as the BKX -- having rallied 14% from its October lows -- has provided much of the fuel behind the SPX's 7% rally over the last 6 weeks. A few days ago, I wrote that I expected the market to re-test the 1,245 area again (before we can proceed higher) -- the profit-taking in the BKX might just make that happen quicker than I thought.

I wouldn't worry too much about profit-taking at this point though. I think the market may be quite safe until Helicopter Ben takes over the Fed's chairmanship at the end of 1Q 2006. Considering that retailers are cutting prices like there is no tomorrow in order to spur on consumer spending, and energy prices seem to have stabilized in recent months (down nearly 20% from the Katrina highs), I think the U.S. economy will just continue to hum along fine for now (as today's GDP report confirmed). Darker clouds await us in the latter stages of 2006 though, as a combination of housing market softening, job growth slowdown and the return of core inflation might be too big of a stumbling block for the U.S. to overcome without some unpleasant consequences. Until then, buy equities on dips and take profits on rallies toward the 1,300 area in the SPX.