Top Charts from the Financials Sector - 12/15/2023
Sector outlook and trade ideas
This week, the list of new 52-week highs set new 52-week highs. Whether you’re looking at the NYSE, the NASDAQ, or the S&P 500, the number of stocks breaking out is at its best level since early 2021.
With all these new highs, it seems an eternity ago (rather than just 9 months) that a spate of bank failures was rocking financial markets. In the first half of March, the S&P 500 Financials sector dropped 15%, led by a staggering 50% decline in regional banks. With interest rates still on the rise and unprecedented paper losses sitting on bank balance sheets, it wasn’t hard to believe the failures of SVB, Signature Bank, and Silvergate were just the tip of the iceberg.
Since that mid-March bottom though, any observer might conclude nothing out of the ordinary had happened within the Financials. They’ve tracked the benchmark S&P 500 more closely than any other sector over that period.
And just like the S&P 500, the Financials sector just broke out to new 52-week highs.
Earlier this year, we used the Financials as a risk trigger. As long as the group was holding above the 2020 highs, we said, there was no reason to be outright bearish on the outlook for stocks. A neutral approach was fine. And if the Financials were breaking down? Sure, then we could start talking about renewed weakness in the broader market. But as long as the Financials were holding up, how bad could things really be?
We’re looking at the Financials in a similar way now. As long as the group is above the February 2023 highs, we can’t be anything but bullish on the sector and the market overall.
The next question is how bullish we should be on the group.
At least 90% of the sector’s constituents are above each their 50, 100, and 200-day moving averages. No other sector besides Real Estate can say the same.
And relative to the rest of the market, the sector has bottomed. The Financials/S&P 500 ratio just broke out to 6-month highs and is above its 200-day moving average for the first time since March.
That outperformance will last as long as value stocks are in favor. The Russell 1000 Growth peaked relative to Value back in November - at the exact same place it did back in 2020 and 2021 - and December is historically one of the worst months for the Growth/Value ratio.
Only Tech features a wider weightings disparity than the Financials when it comes to the two indexes. The Financials are the largest component of Value at more than 20%, but they represent a mere 6.5% of Growth. So as long as the Growth/Value ratio remains stuck below the former highs, it makes sense to favor the Financials.