Are UK bank shares oversold?

Low interest rates appear to be annihilating investor interest in bank shares. It is no coincidence that bank stocks are dropping sharply as interest rates slump.

Look at Royal Bank of Scotland (RBS). Prices have dived into intermediate lows even though the gov-owned bank paid a £1.7 billion (12p) special dividend on August 15.  What is more worrying is the position of RBS’ long-term pivot highs. Each appears to be lower than the one before.

For Lloyds (LLOY), the decisive breakdown below the 56p support led to new multi-year lows. The ‘breakaway’ gaps accentuated Lloyds’s decline.

Turning to Barclays (BARC), its share price trend too suffered from a severe hammering over the past month. Prices first encountered resistance at 160p then nosedived below the prior support level at 145p. The recent slide extends Barclay’s long-term trend.

The banking behemoth HSBC (HSBA) did not perform well. Prices reached multi-year lows – beneath the psychological 600p – just recently. The volatile situation in Hong Kong will further cloud HSBC’s commercial outlook.

Overall, it is clear that bank stocks are under persistent selling pressure in the UK. Brexit, low interest rates, and the deteriorating macro outlook are just some of the negative factors hitting the sector.

Tactically, however, I would not favour chasing the sector aggressively lower due to the risk of a sharp bounce. The current slide is oversold and interest rates may rebound. If short, remain so and protect positions with firm exit stops.

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