(Premium) Time to Buy the Beaten Down Financials?

Is now the time to buy this beaten down sector? Or are more new lows headed our way?

We’ve taken a cautious approach to Financials since the banking turmoil in March took the sector from ‘breakout watch’ to multi-year relative lows in just a few days’ time. We think the setup has improved considerably over the past month.

A second round of regional bank scares drove the sector to new lows at the beginning of May. But unlike the March selloff, momentum failed to get oversold on this most recent decline. Remember, the strongest trends don’t care about momentum divergences, and even if prices do rise from here, the longer-term trend is clearly down. Given the action we’re seeing, though, we think a mean reversion is likely.

Our confidence partly stems from multi-decade support that remains intact. As long as Financials are hanging above their 2007 highs, how bad can things really be?

The relative strength of some insurance names helped to prop up the sector during the March, and they’ve continued to move higher. Arthur J. Gallagher & Co. is halfway to our $250 target.

Marsh & McLennan just broke out, too. We’ve wanted to be buying a move above 175 with a near-term target of 195.

Globe Life continues to consolidate above support, and the risk-reward couldn’t be more clearly defined for us. If GL is above 107, we want to be long with a target of 137. But we don’t want to be involved if it’s below the January 2020 highs.

The mean reversion trade, though, is most apparent in the banks. We don’t need to swing for the fences here, especially with the sector in a longer-term relative downtrend. But that doesn’t mean we have to ignore shorter-term opportunities. Check out the bullish momentum divergence in the S&P 500 Regional Banks sub-industry. Moreover, that divergence is occurring at a great area of potential support in the 2020 lows.

Here are the two cleanest setups. Citizens Financial put in the same bullish momentum divergence, and it’s occurring at the 38.2% retracement from the COVID selloff. If we’re below that retracement level, we need to avoid this like the plague. Otherwise, we can target a near-term move up to $31, which is 20% higher from here.

M&T Bank never even fell into oversold territory on the most recent decline, and that’s the type of relative strength we like to see. MTB is stuck below the 2007 and 2014 highs for now, which also happened to be a key rotational level during 2020 and 2021. We can’t be long if we’re below that resistance level. On a break above it, though, we ‘d look for a mean reversion to the 200-day moving average.

We like the setups, but we need to be careful and not get too enamored with any rally in the regionals. True, trend reversals start with a mean reversions. But more often than not, trends stay intact. We’ll need to see a lot more before having any conviction that the bear market in banks has fully run its course.

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