ASX bank shares have been outperforming recently, but one expert is warning that the sector is in for a rude shock next month during their reporting season.
That's when three of the big four ASX banks will hand in their profit report cards. And while their results are expected to be good, this may not be enough to save them from a big sell-off.
That's the view of Bell Potter's high profile institutional dealer Richard Coppleson.
ASX bank reporting season a double-edged sword
He pointed out that ASX bank shares typically rally into their results before falling off a cliff around the middle of May.
The three big banks that will report their results next month include Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking GrpLtd (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB).
Their shares have been outperforming the S&P/ASX 200 Index (Index:^AXJO) in the last three months.
ASX bank share prices outperforming
The ANZ Bank share price jumped 20%, the Westpac share price rallied 18% and the NAB share price gained 12%.
In contrast, the ASX 200 benchmark is up a more modest 6.5% over the period.
The outlier is the Commonwealth Bank of Australia (ASX: CBA) share price, which only kept pace with the broader market. The bank reported its first half results in February.
Seasonal weakness during the ASX bank reporting period
But their golden run could be interrupted. Coppleson noted that in six of the last 11 years, the ASX banking sector lost ground. The average loss over those years is around 1.6%.
History shows that it's the Westpac share price and ANZ Bank share price that fare worse than the broader group too.
It's worth pointing out that May tends to be a seasonally weak period for share markets. That's how the adage "sell in May, go away" came about.
The interesting thing though is that ASX bank shares are usually the second worst performing group in May, right after ASX insurance shares.
Not all trends are your friends
Another significant point worth noting is that ASX bank shares have broken the rules in the last three consecutive years. These shares have rallied in the month of May from 2018.
The COVID-19 market rebound helped ASX bank shares chalk up an impressive 4.2% jump last year.
But Coppleson believes ASX bank shares will revert to trend and fall next month. This is because they are now a "crowded trade" as most institutional and retail investors have rushed to buy these shares.
Why this May could be particularly bad
Investor have jumped on the bandwagon due to high expectations of a good result and a big rebound in dividends.
This means they may be quicker to dump the three reporting big bank shares the instance they go ex-dividend by around the middle of next month.
Having said that, the sell-off could be temporary. The fact is, the outlook for our banks remain positive.
Further, ASX banks are tipped to keep increasing their dividends over the next few years. A sell-off may mark a buying opportunity for longer-term investors.
