Active traders are constantly on the lookout for sectors in the market that are resilient to market sell-offs and are trading near long-term levels of support. One of the sectors worthy of particular attention over the past few trading sessions has been financials. The brief period of weakness in early February presented an interesting buying opportunity for the bulls. In this article, we take a look at the charts and try to determine how traders will position themselves over the weeks and months ahead.
Diversified financial services, insurance, banks, capital markets, mortgage real estate investment trusts, consumer finance and the mortgage finance industries all make up the financial sector. In a way, the companies that conduct business in this segment act as a backbone to the free market system we known in North America by providing capital and liquidity to individuals and businesses through a wide variety of services. For retail investors looking to gain exposure to this sector within their portfolios, one of the most common methods is to turn to products such as the Financial Select Sector SPDR Fund (XLF). Fundamentally, this fund comprises 87 holdings and trades with a gross expense ratio of 0.13%.
Taking a look at its chart, you can see that XLF is trading within a well-defined uptrend. The ascending trendlines along with the 50-day and 200-day moving averages have propped up the price after broad market corrections in the past, and most traders will expect these levels to do the same in the future. From a technical analysis perspective, this chart patterns suggests that traders will hold a bullish outlook on the major financials until the price moves below one of the mentioned levels of support. (For further reading, see: 4 Hot Financial Sector Stocks.)
While the major financial institutions tend to get all the attention, the smaller regional players are also starting to show signs of growth. Taking a look at the SPDR S&P Regional Banking ETF, notice how the price recently crossed above a horizontal trendline and how the ETF was successfully able to retest the newfound support in February. This type of behavior suggests that the bulls are in control of the momentum and that prices in this group are headed higher. For further confirmation, traders will look to the golden crossover between the 50-day and 200-day moving averages as well as the moving average convergence divergence (MACD) indicator and its signal line. These two signals are common buy signs and also point to higher prices. (For more, see: Financials Could Be Getting Ready to Move Higher.)
One of the most well-known financial companies in the world is JPMorgan. With a market capitalization of over $400 billion, there are few around with economies of scale that seem to come so naturally to this banking giant. Taking a look at the short-term chart, you can see that the price is trading along a well-defined uptrend guided by the 50-day moving average (blue line) and the ascending trendline. Traders will likely maintain a bullish outlook on this company until the price closes below the support and signals a major reversal.
The Bottom Line
Financials are usually considered one of the most stable sectors in the market due to the nature of the underlying business. Strong recurring cash flows, relatively high dividend yields and overall strong demand for financial products are several driving factors to the sector's success. Based on the chart patterns shown above, it appears as though this sector will likely continue to win favor with investors, and it wouldn't be surprising to see prices continue to climb higher for weeks or months to come.
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.