Financial stocks are likely to start out-performing versus the rest of the market. This is specifically related to Yields and the Yield curve turning higher.
Whether or not this is an intermediate-term inflection point remains premature, but it’s certainly been a very sharp move lower in Treasuries (higher in yields).
I expect this to extend in the days to come.
Financials very well could provide some necessary spark to the broader market that’s much in need of a savior to carry the load as Tech faces probable consolidation from overbought levels.
Healthcare is also showing some good strength on Abbott Laboratories (ABT) and we are seeing some evidence of this sector starting to snap back to life (as the hunt for the Vaccine endgame starts to take shape).
Thus far, it’s tough to weigh in that Financials and Healthcare alone might buoy the stock market indices and that a Tech decline could be offset sufficiently that any sort of rotation out of Technology wouldn’t hurt indices.
For now, it’s right to stick with trends until evidence proves otherwise. As we’ve discussed, all the internal damage in the world doesn’t mean much if the broad stock indices are able to fight through it and some evidence of trend damage is paramount before attempting to bet against this market.
I’m expecting that the S&P 500 Index gets up to 3510 and then stalls out next week. We’ll stay long through the weekend, and favor a bounce in Financials and Healthcare to take charge along with continued strength in Industrials while watching Technology carefully.
With this construct in mind, here are 5 investing themes to watch:
Five key themes worth highlighting:
1) Technology has regained leadership with broad-based movement back to new highs, and Growth dominating, but bifurcation is growing larger.
2) Treasury yields have pushed to new weekly highs which should aid Financials.
3) Sentiment is starting to grow extreme, with Put/call levels back under .50 and 13-week moving average of CBOE Equity Put/call lowest in 13 years.
4) Breadth has tailed off “big-time” with more than 5 occurrences in the last few weeks of more Decliners than Advancing issues.
5) Cyclical time of importance starts in September, leading indices lower while implied volatility spikes.
Chart Spotlight: Equal-Weighted Financial Sector ETF (RYF)
Looking at the Financials on an Equal-weighted basis (via the ticker RYF), we can see that the Sector has been coiling.
It shows momentum turning up sharply in recent days coinciding with Bond yields pressing higher.
This is important given that Financials is the 3rd largest sector per the S&P 500 Index. A breakout of this triangle would help markets likely hold up, even if Tech starts to falter. Thus this chart above is important to watch carefully in the days ahead.
If you have an interest in seeing timely intra-day market updates on my private twitter feed, please follow @NewtonAdvisors. Also, feel free to send me an email at info@newtonadvisor.com regarding how my Technical work can add alpha to your portfolio management process.
Twitter: @MarkNewtonCMT
Author has positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
