Are Financials Setting Up for a Relative Breakout?

The sector everyone loves to hate. Financials!!

There comes a time when so many people are hating (selling), that there’s no one left to hate (sell). I think that time is approaching. And if this stock market is going to have an incredible year, as some are calling for, then the banks are going to have to participate. And not just by joining the parade, but by marching up front.

There is resistance on this ratio chart right around 0.11 ($XLF vs $SPY). The downward sloping 200-day moving average is sitting currently at 0.108 and trying to flatten out for the first time in two years. We’ve seen higher lows in the ratio for 5 months now with a fixed level of resistance up above.

Some technicians might call this an ascending triangle, but the truth is that it does not matter what it’s called. What this chart is telling us is that the buyers are getting less and less patient.  With every sell-off, the buyers keep coming in quicker. We also know from this chart that there are sellers right around this fixed level.

The Relative Strength Index has also been showing positive signs during this bottoming out process. RSI held support during the Thanksgiving selloff and recently got into overbought territory above 70. These are Bull Mode characteristics folks and I can’t ignore them.

I’m looking for a breakout above 0.11 as confirmation that this 5 month uptrend in Financials relative to the stock market is still intact. All signs show that this is the case, but confirmation is a great thing. I would be cautious of a breakdown below the dotted trendline, and more importantly the February 27th low. That would tell us that further consolidation in the space is necessary and the relative breakout in Financials is just not ready yet.

Let’s circle back on this topic in a week or two….