The discussion of the Financials sector underperforming has been growing louder as a potential concern on financial social media. This week Financials were the 2nd worst performing sector as well as the worst performer on Friday alone. At 14% of the S&P 500, Financials are an important sector to say the least. Many investors argue that you can’t have a bull market without Financials participating.
In a post Friday, Mark Newton of Newton Advisors notes that “financials have been hard hit after good performance in January but are nearing support into next week, which I think could be a positive for the markets if this group tries to hold and turn back higher.”
Investors should also be on notice something for something else. The small-cap sub-sector’s within Financials are actually much stronger than their large-cap counterparts. This is a topic seemingly glossed over at the moment. The most important tell for Financials going forward is what happens in both Regional Banks and Broker-Dealers. These two groups are working on false-breakdowns above prior 2007 and 2017 highs. If these two groups can continue higher that is a great tell for risk-appetite in Financials.
Todd Gordon, founder of TradingAnalysis.com, was on CNBC’s ‘Off the Charts’ segment yesterday also discussing Regional Banks. He touched on the outperformance of KRE relative to XLF, a bullish sign for the sector. With Financials underperforming the market and below a 200 day moving average they have near-term work to do. Todd also feels that the flattening 2-10 Yield Curve is putting pressure on Financials but there is a possibility for an inverse head-and-shoulders pattern in KRE to develop.
What’s most important for investors to understand is Berkshire Hathaway and J.P. Morgan are the top two holdings in XLF, making up 24% the ETF. These two stocks are very important for the direction of Financials as well as the overall stock market – Berkshire and JP Morgan are top 10 S&P 500 components.
In closing. while XLF has not outperformed the S&P 500 since 2000-2002 what’s most important is that Financials can stabilize and work their way higher in this symmetrical triangle pattern, ultimately breaking out.