[Chart Of The Week] Why Are Financials Breaking Out?

JC Parets
August 22, 2016

When you talk about the most important sectors in the stock market, financials certainly have to be near the top of the list. Technology is the largest sector in the S&P500 by market capitalization, but bull markets need participation out of Financials. For argument sake, we'll chalk these up as the two most important sectors in the market together representing over a third of the entire S&P500. Today, we'll focus on the Financials and why I think they are now breaking out.

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[hide_from visible_to="member"]First, here is a chart of the S&P500 Financials Sector Fund $XLF attempting to break out of a 15-month consolidation trading between two converging trendlines. An upside resolution here is extremely constructive:

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Financials w

Looking a little closer, here is what Financials look like on a daily timeframe. We want to be long $XLF if we're above the downtrend line from last Summer's highs:

Financials d 2

Within that space, the insurance companies look solid. We want to be long $IAK if we're above the downtrend line from last Summer's highs:

Insurance d

When you ask, what is it that is driving Financials higher? Look no further than its largest component. Berkshire Hathaway represents over 9% of the Sector ETF. Here is what it looks like from a long-term perspective. I think we head up towards 174, which would certainly help drive Financials higher:

Berkshire Hathaway -BRK.B-

While Berkshire Hathaway isn't a pure play in the space, I think we can all agree that J.P. Morgan is. Representing almost 8% of the Financial Sector and coming in hot with$240 Billion in market cap, $JPM is attempting to break out of a 15-month consolidation to take shares above the infamous March 2000 highs. I think we do it:

J.P. Morgan - JPM

Short-term we still want to be long J.P. Morgan if we're above the downtrend line from last year's highs:

J.P. Morgan - JPM d

It's not just one chart that has me bullish towards Financials. It's collectively the weight-of-the-evidence. I like them. And higher prices for financial stocks is yet another feather in the hat for the stock market bulls.

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Tags: $XLF $JPM $BRKA $IAK

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