[Chart Of The Week] Is The Next Sector Rotation Into Financials?

JC Parets
July 13, 2016

One of the biggest reasons why we've been hesitant to be bullish of stocks, particularly as an asset class, since early April is because of the severe underperformance from bank stocks. Not only do we need participation out of Financials during bull markets, but we need them to lead. Unfortunately, they've been doing the exact opposite, and dragging stock market indexes around the world lower.

Has something changed?

These are the details from yesterday's Mystery Chart

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[hide_from visible_to="member"]Today we are looking at a chart of the S&P Financials Index ETF $XLF relative to the S&P500 itself. In other words, bank stocks compared to the rest of the market. What I see is very simple: A failed breakdown below support from the February and April lows and a bullish momentum divergence to add fuel to the fire. Here is the daily line chart:

Click on Chart to Zoom in

xlfspy d

I have chosen this as the Chart of the Week for 2 reasons. First of all, there is a mean reversion trade here. We can be long XLF and short SPY, for a trade as long as we are above those February and April lows. We want to be taking profits near former support levels from 2014 and 2015 near 0.0115.

From a more macro perspective, if financials are outperforming the S&P500 and the spread is squeezing higher, that's the sort of environment where stocks as an asset class are likely doing very well. This would be a bullish development for stocks.

I like this one.

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