Bank stocks have significantly underperformed the broader market over the past year, with market watchers blaming everything from the flattening yield curve to rising deposit betas to recession mumblings. The financial sector's bellwether exchange-traded fund (ETF), the Financial Select Sector SPDR Fund (XLF), is trading up just 0.51% for the year compared to the S&P 500 Index returning nearly 10% over the same period.

However, sentiment swiftly changed late in the first quarter (Q1), with XLF depositing gains of 8.25% over the past month, almost double the S&P 500's 4.75% return. After a solid round of Q1 earnings and optimistic outlooks from banking heavyweights, the sector continues to see inflows despite getting Federal Reserve assistance in the form of additional rate hikes in 2019.

"The consumer's in good shape, the balance sheet's in good shape, people are going back to the workforce, companies have plenty of capital ... business confidence and consumer confidence are both high ... So it could easily go on for years. There's no law that says it has to stop," JPMorgan Chase CEO Jamie Dimon said in relation to economic conditions on the bank's Q1 conference call, per Barron's.

Those who want to position for a rotation back into bank stocks should look to enter these three sector leaders on retracements to high-probability buying areas. Let's discuss each name in further detail below.

Citigroup Inc. (C)

With a market capitalization of $160.03 billion, Citigroup Inc. (C) provides financial products and services to consumers, corporations, governments and institutions in over 100 countries. The New York-based bank operates through two business segments: Consumer Banking and Institutional Clients Group. Citigroup's Q1 earnings jumped 11% on a year-over-year (YoY) basis, bolstered by share buybacks. However, revenue slipped 2% during the period amid lower equity trading volume. The banking giant has beaten Wall Street's earnings expectation over the past four consecutive quarters. As of April 24, 2019, Citigroup shares issue a 2.89% dividend yield and have jumped 33.79% year to date (YTD), outperforming the industry average by almost 18% over the period.

The bulk of the stock's YTD gain occurred in January and April, with the price trading sideways throughout February and March. The relative strength index (RSI) sits just below overbought territory, indicating that the stock may see some consolidation before moving higher. Traders should look for an entry point at $66 – the top of the February and March trading range, which now acts as support. The level also sits within proximity to the 50% Fibonacci retracement area and 200-day simple moving average (SMA), adding further confluence. Consider banking profits on a test of the September swing high at $74.20 and placing a stop-loss order slightly under the October swing low at $62.31.

Chart depicting the share price of Citigroup Inc. (C)
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JPMorgan Chase & Co. (JPM)

Dow component JPMorgan Chase & Co. (JPM) offers a wide variety of financial services including consumer banking, investment banking and asset management. The company controls over $2.5 trillion in assets, making it one of the largest financial institutions in the United States. JPMorgan exceeded analysts' top- and bottom-line Q1 projections, reporting earnings per share (EPS) up 44% from the prior-year quarter. The universal bank credited strong trading results, higher interest rates and a lower tax rate for its positive quarterly results. Trading at $113.74 with a market value of $369.36 billion and offering a dividend yield over 3%, JPMorgan stock has gained 18.15% on the year as of April 24, 2019.

The banking giant's share price started its current leg higher in late March and now sits just 2.42% below its 52-week high of $116.56 set on Sept. 20. In recent weeks, the 50-day SMA has converged toward the 200-day SMA, suggesting the emergence of a new long-term uptrend. Similarly to Citigroup, JPMorgan stock appears overbought in the short term, with the RSI giving a reading above 70.0. Traders should open a long position on retracements to $106, where the price finds support from the 50% Fibonacci retracement level and the 200-day SMA. Think about exiting for a profit if price returns to the 52-week high and cutting losses if the stock closes below $104.

Chart depicting the share price of JPMorgan Chase & Co. (JPM)
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Morgan Stanley (MS)

Founded almost a century ago, New York-based Morgan Stanley (MS) engages in investment banking, providing financial services such as institutional securities, wealth management and asset management to its clients. The multinational bank posted a Q1 profit of $1.30 per share, easily beating analysts' predictions of $1.17 per share. Revenue reached $10.3 billion over the period, topping the Street's expectations of $9.94 billion. Better-than-expected results in wealth management and fixed-income trading contributed to the upbeat results. From a valuation perspective, Morgan Stanley trades at a discount to its competitors with a price-to-earnings ratio (P/E ratio) of 10.1 versus the industry average of 13.5. The stock has a $79.86 billion market cap and is up 20.18% YTD as of April 24, 2019. Investors receive a 2.84% dividend yield.

Morgan Stanley's share price has formed a broad inverse head and shoulders pattern between October and March, indicating that a significant bottom may be in place. The stock has tracked 12.20% higher this month after spending the previous two months in a five-point trading range. Those seeking a swing trading opportunity should buy pullbacks to the $45 level – an area where the price should encounter multiple facets of support from the neckline of the inverse head and shoulders pattern, the 200-day SMA and 50% Fibonacci retracement level. Set a take-profit order near the right shoulder of the 2018 head and shoulders top at $54 while simultaneously placing a stop beneath the October low at $42.29.

Chart depicting the share price of Morgan Stanley (MS)
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