Financial Sector Moves Higher as Markets Grow Optimistic

Market Moves

The financial sector, considered by some to be a predictive indicator of stock price movement, has moved distinctly higher over the past three trading sessions. This price action marks a breakout that could be a significant indicator for all stocks. The financial sector, as tracked by State Street's Financial Select Sector SPDR Fund (XLF), has outpaced the S&P 500 (SPX) (see chart below), signifying that investors are increasing their investment activity in a variety of ways.  

The S&P 500, the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) all ended the day nearly unchanged from the previous close and showed a similar narrow range of trading as well. Investors may be waiting for news to break regarding the U.S.-China trade talks since most of the bellwether companies have reported earnings so far. Despite this hesitation, investors haven't shown any action that resembles profit-taking. This suggests that they are growing more optimistic.

Chart showing the performance of the Financial Select Sector SPDR Fund (XLF) and the S&P 500

Guess Who Won the Discount Broker Battle

Oct. 1 came and went for most people like just any other day. For the discount brokerage industry, it may as well have been D-Day, where D stands for deep, deep discount. On that day, discount broker The Charles Schwab Corporation (SCHW) announced that it would no longer charge commissions on stock trades. The impact was dramatic. Until that point, trade commissions were a significant, though not the largest, revenue source for most brokers.

By winning the race to zero, Schwab announced that it was fending off competition in the fintech space from companies such as Robinhood or Betterment. But in fact, the move served the broker well in better positioning itself against its more traditional competition, Fidelity (which is not publicly traded), TD Ameritrade Holding Corporation (AMTD), E*TRADE Financial Corporation (ETFC), Interactive Brokers Group, Inc. (IBKR), and Ally Financial Inc. (ALLY).

With the benefit of one month's hindsight, we can see how Schwab managed to convince investors that it knew what it was doing. The chart below shows that, since the announcement, things have worked out well for Schwab. Shares of Schwab have recently managed to recover and even outpace the iShares US Broker-Dealers ETF (IAI).

Chart showing the performance of discount brokerage stocks

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What Comes Next for Schwab

In the midst of this market-segment upheaval, the price chart for Schwab shows an interesting bit of price activity. The chart below shows how the price action has managed to create a broadening pattern over the past several months. This pattern reflects growing uncertainty and disagreement among analysts and investors about the prospects for the company.

It is no surprise that this price pattern showed up in front of the announcement regarding commission changes. But since the announcement, the price action has made two swing low price points before breaking out of the broadening formation. Technical analysts recognize this as a potential reversal signal, which may imply a continued upward trend from this point forward.

Chart showing a potential reversal for The Charles Schwab Corporation (SCHW)

The Bottom Line

Stocks closed nearly unchanged today even as the financial sector jumped higher for the third straight day. This bullish signal may imply that the market has room to make another upward move. The discount broker industry has shown sufficient price action to make it clear that Schwab, the company that first announced no-commission trades on stocks, knew it would hold a competitive advantage in such an environment. Schwab's shares show price action that looks distinctly bullish going forward.

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