One of the most consistent market criticisms bears have pointed to over the past several years is the lack of participation from banks and Financial stocks as a group. The concern has certainly been warranted as Financials are the worst performing sector outside of Energy and Materials since the market registered record highs back in January of 2018. While the broader market has grinded higher by 10% since making those highs, Financials are one of just three sector ETFs to post a negative return over this period. You can see the lackluster performance from Financials in the chart below.
Back in July, we wrote about the new highs in the iShares US Financials ETF, $IYF in a post titled Choosing the Best Option for Your Financials and contrasted it with the underperformance from the Financial Sector SPDR, $XLF. We pointed out some major differences in the composition of these two ETFs that were likely responsible for the relative weakness of XLF. One of these reasons was XLF has more exposure to the major US banks. For instance, the four largest US banks, JP Morgan ($JPM), Bank of America ($BAC), Wells Fargo ($WFC) and Citigroup ($C) comprise 30% of XLF vs only 17% of IYF. The big banks have been laggards since the early 2000s, particularly on a relative basis.
The decade-long trend of underperformance from banks could be coming to an end as investors have embraced these stocks in recent weeks and months with Bank of America and Citigroup recently making new 52-week highs while JP Morgan is trading at fresh all-time highs. Here is our custom index of the six largest banks in the country, the “Big 6” Bank Index, which together comprises over 35% of the Financial Sector as measured by XLF.
Prices recently resolved higher from a multi-year continuation pattern as they pierced through trendline resistance drawn from the January 2018 highs. Notice that prices are not only trapped below overhead supply at 2018’s highs but also 2007’s highs. This is similar to the Financial Sector SPDR which has been unable to reclaim its record highs from 2007 unlike some of the stronger Financial Subsectors like Insurance ($IAK) and Broker-Dealers ($IAI) and other Sector ETFs like IYF which are already trading above these levels.
Long story short, the Financial sector isn’t going to make new all-time highs without the banks participating. So now that banks are finally catching a bid and the other areas of Financials are already trending well on an absolute basis, we anticipate that XLF will soon prove bears wrong and also reclaim its all-time highs. We’ll be keeping a close eye on our Big 6 Banks Index as we believe this is providing an early indication that the Banking industry will soon break out and act as the driving force behind new highs for Financials. Hope you enjoyed this post! As always, reach out to me at Strazza@thechartreport.com with any questions or comments.