Financials Sector Outlook - 11/17/2023
Top charts and trade ideas from the Financials sector
The Financials sector is in the middle of the pack this year, outperforming 5 sectors but lagging the other 5. Unfortunately, in a year where returns have been dominated by gains at the top, being in the middle of the pack doesn’t equate to ‘average’. The Financials have risen a paltry 1.5% for the year. The S&P 500 is up 17.5%.
On the bright side, things haven’t gotten any worse since the immediate aftermath of the spring bank collapses. The sector has tracked the benchmark index step for step over the last 6 months. We’re wary, though, that this consolidation pattern for the Financials vs. the S&P 500 will resolve lower. Consolidations tend to result in the direction of the underlying trend.
A downside resolution would have us looking to underweight the sector and find other places to put our money. But ‘underweight’ is different than ‘short’. This is a bull market after all, and being short in the face of broad market tailwinds isn’t something we’re particularly interested in.
Besides, we don’t have much reason to think Financials will decline on an absolute basis. At least not while they’re consolidating above their 2007 highs. This level was our line in the sand for the back half of last year and during the banking panics of the spring. If we’re breaking down below those former highs then sure, we can start talking about ways to short the group. But as long as we’re above them, how bad can things really be?
The same goes for Financials on an equal weight basis. Our line in the sand here is the pre-COVID highs. If we’re below that, the overall market is probably under pressure, and we’ll probably be looking for a lot of short opportunities. And in that scenario, Financials are probably leading on the downside. But that’s not the environment we’re in right now.
Sorry bears, but you had your chance. I can’t think of any stock in the sector that’s more important than JPMorgan - it’s one of the most important stocks in the world for that matter. And you guys had JPM on the ropes a few weeks ago. You pushed it below the pre-COVID highs and knocked it beneath the 200-day moving average for the first time all year. Then you fumbled the opportunity. JPM is back above that key level - and from failed moves comes fast moves in the opposite direction.
With the leadership of JPMorgan, perhaps we should give more weight to a bullish outcome for the sector. We’ve laid out the levels where we’d turn more bearish on Financials, but what’s the bull case? How about the rapid improvement in breadth?
Right now, more Financials stocks are above their 50-day moving average than any other sector. The number above their 100 and 200-day moving averages is also better than the overall S&P 500. There’s a lot of long-term trend damage to repair still, but the Financials are well on their way.