In the most recent edition of ADAPT Weekly, I outlined an overwhelming number of relative strength signals that have developed and continue to develop, favoring global equities over all other asset classes.
If you missed it, here’s a link to that article (click here to view article) – it’s an easy read and one I would recommend to anyone who wants to get a clear picture of today’s inter-market relationships.
This week, the focus is all about one sector – Financials. So, let’s just get right into it…
For 13 years, one of the most important sectors on planet Earth has made zero progress. But that may be about to change, as the broad Financial sector looks to break out to new all-time highs.
XLF, the iShares Financial sector ETF and my sector proxy, is pushing up against former highs that reach as far back as 2007.
XLF hasn’t been able to break out above its 2007 highs. That resistance was tested in 2015 and again in early 2020 and proved to be too much for the sector as it became just another covid casualty and dropping like the proverbial stone.
However, as the saying goes -“The bigger the base, the bigger the breakout”. And 13 years is a big base!
So, are investors about to finally see a new bull market in financials or will the sector once again fail and disappoint? Well, I wish I knew for sure. I promise you that no one knows, regardless of claims to the contrary. There’s no such thing as a sure thing when analyzing markets.
But the way I learned it – the more times a level is tested, the more likely it is to break.
Will #4 be the magic number pushing Financials over the top and on to a new bull run? The weight of the evidence seems to suggest so.
To eliminate the noise and add a little market clarity, I pulled a relative strength chart comparing Financials (XLF) to the broader stock market (SPX).
And since November 2020, Financials have been rocking and rolling, demonstrating clear dominance over the broader market – see rising black line on ratio chart – indicating financials showing relative strength over the S&P.
Safe to say, Financials have a long way to go before breaking out to new highs on a relative basis vs the broader market, but if this trend can continue, it sets up the potential for some profitable trades in Financials.
And then there’s this – tech has been the big winner the last several years on both a relative strength and absolute return basis – but something has changed.
Not only have Financials outperformed the broader S&P 500 over the most recent 3 months, but since September 2020 – Financials have very quietly outperformed big tech on a relative basis. Bet ya didn’t hear about that on your favorite financial news network!
The choppy, but rising line on the ratio chart above – highlighted with the red arrow, favors Financials over Tech. This is something many investors can miss when looking only at the price charts.
Okay, so we can say Financials are showing some life. And MAY finally breakout, setting up some interesting investment opportunities.
But what’s happening under the hood, what’s happening with the industry groups that make up the Financial sector – what’s leading XLF higher?
Rather than working through each industry group, I’m going to cut straight to the chase – Broker-Dealers & Securities Exchanges have already broken out to new all-time relative highs – doing the heavy lifting for the broader sector.
Here are the stocks driving IAI to new highs; Morgan Stanley (MS), Goldman Sachs(GS), Raymond James (RJF), Interactive Brokers(IBKR), Lizard ltd (LAZ).
And here’s a list of ETFs that rank highest in our Financial matrix:
The rankings are skewed towards Regional Banks and U.S. Broker-Dealer & Exchanges.
These funds can be a great launching off point for your research into the Financial sector.
So, until next week – good luck and good investing.
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