Are Financials Back on the Upswing?

July 19, 2018  |  Michael Reilly

Financial stocks continue to rise this week, adding to the possibility that a bottom may finally be in for the #2 ranked U.S. sector.

Financials have been a beaten down sector since the February market correction, forming a series of lower highs between March and mid July and creating a descending triangle pattern (as seen below).  

Descending triangles are a bearish pattern and indicate distribution (selling) of stock. These patterns are typically a continuation pattern, meaning more selling is to come.

But over the past week,  XLF, the Financial Sector SPDR Financial ETF – an ETF that acts as a proxy for the Financial sector, began to show signs of life, breaking above a negative trend-line that has plagued the ETF for the past six months…

This may indicate that Financials are signaling a reversal of fortune – by breaking out to the upside.

If XLF hopes to return to a positive trend and higher prices, it will need to clear its six-month down trend-line by establishing a series of higher tops and ultimately moving above its February high.

As most of you know, we don’t speculate (or just guess) about what might happen in the weeks to come. We’ll leave the guessing to the market gurus seen on many T.V. networks.

Instead, we find it a better use of our time to look at what the technical indicators are signaling is happening right now – and adjust accordingly.

And right now, the Financial Sector SPDR (XLF) – has given investors a positive signal, by finally clearing both its 50 and 200-day moving averages.

That’s a good sign, because many computers are programmed to buy or sell securities at breaks above or below key levels, such as these 50 and 200 day moving averages.

This computerized buying can (and often does) become a bit of a self-fulfilling prophecy.

You see, as more and more computerized buying drives prices higher, more computer programs are triggered to buy at specific price levels, fueling yet more demand and higher prices.

This process continues to pick up speed and momentum. We like momentum.

And, as prices continue to rise, it also forces short-sellers – investors who had sold short stock to profit from falling prices, to buy back or cover their short positions to avoid potential losses. This process of buying back shares causes even more demand and higher prices!

So, investors interested in this sector can continue to watch the direction of XLF as a proxy for opportunity in financials.

Now, moving away from price charts for a moment and focusing on sector internals via the P&F chart for XLF, we see the chart is in a column of O’s – indicating supply is in control of the sector and has been since February’s sell-off.

But, even though supply and lower prices have been in control – at its current chart position of 27.93, the chart is very close to flipping back to a column of X’s, as buyers (seen as demand) reemerge taking control of Financials once again.

Digging even deeper, (just because we can) we can see much of the gains earlier this week in Financials have been led higher by big banks, which is important because banks are the biggest part of financials, comprising 44% the sector.

The charts below show both Bank of America (BAC) and J.P. Morgan Chase (JPM) already breaking through their respective falling trend-lines.

Investors may want to continue to monitor XLF, to see if the strong performance of the big banks and their 44% of the financial sector can continue to help bring additional gains to the sector moving into the second half of 2018.

For those interested, here are a few ETFs that are currently highly ranked on a relative strength basis and therefore worthy of review.

They include; KRE – the SPDR Regional Bank ETF, IAI – the iShares U.S. Broker Dealer & Securities Exchange ETF, and PSCF – the Invesco S&P Small Cap Financials ETF.

If Financials can continue to reassert themselves through strong demand and rising prices, the ETFs listed above could provide investors opportunity for both market and sector out-performance.

If you’re a client of Rowe Wealth Management, you can be sure we’re monitoring the situation and re balancing accordingly.

If not, you may want to check with your financial adviser to ensure they’re aware of the action in the financial sector. If this is news to them, consider scheduling an appointment with one of our advisers, we can quickly evaluate your portfolio and offer advice on how you might position yourself to take advantage of the recovering financial sector

Click here to see available appointment times.

As always, and until next time, invest wisely….

Michael Reilly

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