Financial Sector (XLF): Consolidation May Lead To Higher Prices

Is The worst over for the Financial Sector?  After a good bounce, more work needs to be done.

On Friday morning, I provided a brief update on the Financials.  Today I want to explore that with a bit more color here. You can also follow my work on Newton Advisor.

The surge in yields over the last two weeks has proven to be a good catalyst for a meaningful bounce in Financial stocks. This sector remains this year’s Worst performing sector, the only S&P 500 sector down on the year, with -1.46% returns through Friday (7/15).  Yet, last week the Financial Sector (NYSEARCA:XLF) returned the 2nd best performance of any of the S&P GICS Level 1 groups, higher by 2.57%. That performance was second only to Materials.

This was an important positive for the broader market given that Financials represent over 15% of the S&P 500 Index (INDEXSP:.INX). That ranks as the second largest sector by capitalization. Much depends on further signs of improvement in US growth for this group to work, as this directly impacts the trajectory of interest rates.  Let’s take a closer look at the technicals.

Macro Technical

Bottom line:  It still looks early for intermediate-term outperformance in Financials, but it’s a good start.

We’ve seen a minor bounce in the Financial Sector after holding right near key trend line support. In short, it held and bounced right where it needed to. On an absolute basis though, Financials looks to have stalled right near key trendline resistance on this bounce.

Two Key Takeaways:

1).  Financials should be starting a larger bounce into August/September, relatively speaking, and the last couple weeks were encouraging.

2).  On an absolute basis, the area at 23.80-24 is an important area of resistance that lines up with former highs from last year.  Until this area is exceeded this initial bounce could “Back and Fill”, pulling back to 22.75-23.15 over the next 3-5 days. That would likely setup for a push higher.

The ability to exceed $24 would be constructive technically for bulls. This move would likely coincide with rising yields and steady US Economic growth/data.

Financial Sector Up Close – Technical Analysis & Indicators

It is still too early to think that a major move is underway in Financials. However, the progress in the last couple weeks has been encouraging. As the daily chart of XLF v SPX shows, Financials have been guided by an intermediate-term downtrend from last Summer which has marked no less than two major highs going back since the latter part of 2015.  The highs from both Nov/Dec 2015 as well as late May in 2016 were both repelled right at this area, and last week’s rally was also halted there, at 23.80-$24.  While the near-term uptick in momentum has been impressive, the ETF is being held at this trendline and should limit the performance of Financials in the short run after a big move in the last couple weeks. However, following consolidation, if prices manage to get back up and exceed $24, this would be a very strong signal that this group, along with the major US Market likely, should continue much higher into the fall.

Financial Sector relative to the S&P 500 –  Encouraging ability to hold where needed and Bounce, but more progress necessary.

As the relative performance chart shows, Financials managed to stabilize and bounce at an exact area of key trendline support which has held this sector in the last six months.  The ability to hold where it needed to and then turn back higher is a bullish development overall for Financials, but yet more work needs to be done before suggesting this group can start to trend higher meaningfully. Similar to the S&P 500 Index, some backing and filling looks necessary.

Thanks for reading.

Twitter:  @MarkNewtonCMT

The author may have a position 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.