When most people think of business or the economy, they tend to first think of the buying or selling products and/or services. Most people are quick to overlook those that sell financial assets. However, it's important to pay attention to financial assets, as Ray Dalio, the founder of the investment firm Bridgewater Associates states, “an economy is simply the sum of the transactions it makes up…a transaction consists of the buyer giving money (or credit) to the seller and the seller giving a good, a service or a financial asset to the buyer in exchange.” 

In the article below, we’ll take a look at the companies that derive their incomes from the sale of financial assets by analyzing the charts of various exchange-traded funds and try to determine if now is the time to buy. (For more, see: Introduction To Exchange-Traded Funds).

Financial Select Sector SPDR Fund

The most widely used exchange-traded product by investors seeking exposure to financials is the Financial Select Sector SPDR Fund (XLF). This fund is comprised of a broad range of financial companies—ranging from banks, insurance companies, capital markets and diversified financial services. Taking a look at the chart, you can see the price has traded above the 200-day moving average since May, which is a signal that the bulls are in control of the long-term trend. The period of consolidation close to the 200-day moving average is providing bulls with an interesting risk/reward setup and it wouldn’t be a surprise to see active traders start to establish a position as close to the trendline or long-term average as possible. From a risk management perspective, stop-loss orders will likely be set just below $18.44 to protect from any downside surprises. (For more, see: 5 Financial Sector ETFs Popular in 2016).

SPDR S&P Regional Banking ETF

As active traders start to drill down into the financial industry, it starts to become clear that the smaller players such as the regional banks are well-positioned for a move higher. Taking a look at the chart of the SPDR Regional Banking ETF (KRE), you can see that there is an obvious upward divergence between the 50-day and 200-day moving averages. This positive divergence combined with the support that the price has found near the short-term trendline suggests that the bulls are in control of the momentum and that the group of companies in this segment could be poised for a strong close to 2016. Based on this chart, it appears that stop-loss orders will likely be placed below $39 to protect from any downside surprises. (For more, see: Top 5 Bank ETFs for 2016).

SPDR S&P Insurance ETF

Another fund within the financial sector that is worth a closer look is the SPDR S&P Insurance ETF (KIE). As suggested above, as traders or investors narrow their focus on specific niches within the financial sector it becomes obvious that there are significant pockets of strength. Taking a look at the chart, you can see that the price is trading within a clear uptrend and there doesn’t seem to be anything that suggests it will reverse anytime soon. Based on this chart, it appears that insurance providers are well positioned heading into the final months of 2016 and beyond. 

The Bottom Line

Investing in financials is often quickly overlooked in favor of companies that sell well-known products or services. Based on the analysis above, it seems that the financials are started to trend higher, and the move seems to be overlooked by the majority of the public. Specifically, the best bet seems to focus on niche segments of the financial sector such as regional banks or insurance. (For more, see: 3 ETFs to Watch).


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