Look To Financials During Periods Of Instability

By Casey Murphy | May 23, 2014 AAA

Weaker-than-expected earnings from Wal-Mart Stores, Inc. (WMT) and slow industrial production are conspiring to prevent markets from climbing into uncharted territory. During these periods of uncertainty, investors tend to flock toward stable assets, such as bonds and financials. For example, wary investors drove the yield on the 10-year Treasury to 2.48% recently. It would not be surprising to see investors now start to look to financials as the next source of stability. (For a quick refresher, check out The Industry Handbook: The Banking Industry).

Exposure To Global Financials

Astute traders may want to take a closer look at the iShares Global Financials ETF (IXG). This exchange-traded fund is one of the most popular vehicles to gain broad exposure to financial services, commercial and retail banks, investment funds and insurance companies. Given the global nature of the ETF, it could be an ideal selection for those seeking diversification. As you can see from the chart below, IXG has been trading within a prolonged uptrend since June 2013. Notice how the nearby 200-day moving average – combined with the ascending trendline – has provided support for the sector during periods of short-term pullbacks. The tightening toward these key support areas suggests that this could be an ideal entry point and that the long-term trend should remain upward. Stop-loss orders will likely be set directly below the 200-day moving average, which is currently at $54.40. (For more, check out The Stop-Loss Order – Make Sure You Use It)

 

iShares Global Financials ETF – Key Statistics

The IXG ETF currently has total net assets of $310 million and is comprised of 225 holdings. It includes holdings from the United States (40.36%), United Kingdom (9.33%), Australia (8.14%), Japan (6.74%) and Canada (6.73%), among others. From a diversification perspective, the fund is nicely spread throughout the world and can be used to provide both upside and downside protection during periods of uncertainty.

The top holdings of the ETF include:

Holding

Sector

Country

Weight

Wells Fargo & Co. (WFC)

Banks

United States

3.55%

Berkshire Hathaway Inc. Class B (BRK.B)

Insurance

United States

3.48%

JPMorgan Chase & Co. (JPM)

Banks

United States

3.09%

HSBC Holdings Plc (HSBA.L)

Banks

United Kingdom

2.91%

Bank of America Corp. (BAC)

Banks

United States

2.38%

A Closer Look At Wells Fargo

Based on the chart of Wells Fargo (shown below), you’ll notice that it's trading within a very strong uptrend. Many of the financial stocks mentioned above are trading within a similar pattern, and there are few technical signals that suggest this should reverse anytime soon. From a technical perspective, it's been interesting to see how the 50-day moving average (blue line) has been able to provide support for the sector during most of the past two years (shown by the blue arrows). Traders will want to watch the price action over the next couple of weeks to see if the bulls respond and start to take positions, which will send the price higher.

The Bottom Line

Economic indicators are starting to bring the broad-market rally into question. During these periods of uncertainty investors generally start to look for stable sectors to place their money until conditions improve. As you can see from the charts above, the global financial sector, as measured by the iShares Global Financials ETF, is an ideal way to play this move. Key components such as those mentioned in the table above are all trading in significant uptrends and provide a strong basis for predicting the 50-day moving average of IXG will continue to provide downside support in case economic conditions deteriorate. (For more, check out Investing With A Purpose)

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