Strong Financials are Evidence of Risk Appetite

JC Parets
February 21, 2018

Financials ripping to all-time highs is not something we see when stocks are in a downtrend. To the contrary, this is strong evidence of risk appetite for stocks. This seems to be something that is being underappreciated right now but I think is worth pointing to, again.

There are a lot of questions about the sustainability of the uptrend in stocks. Some might even say that stocks are "stretched" or have gone "too far too fast". But when you look at Financials, they're just getting going now. From many different perspectives, this sector has done nothing for a long time and is just now breaking out.

The first chart I want to point out is the Broker Dealers & Exchanges Index Fund. Look how long it took this index just to get back to its peak in 2007. The $IAI broke out in the 4th quarter and I think can see 85, which is still almost 30% higher:

If Broker Dealers & Exchanges are above their 2008 highs, it's hard for me bearish equities with a straight face. I can make the same argument about the Regional Bank Index. If this thing is above its 2007 highs, how can we be bearish bank stocks, and therefore the overall market?

We want to be watching these two indexes. If the $KRE has another 10 points to the upside and Broker Dealers & Exchanges are just getting going, I think we need to continue to err on the bullish side of stocks. From a risk management standpoint, the levels are being laid out for us very clearly here.

A good tell right now, in my opinion, will be Goldman Sachs. The fact that we are above the 2007 highs is representative of the fact the group in general is doing the same. So if bellwether $GS is above 250, we want to err on the long side. But if prices are below that level then in all likelihood something bigger is going on and the risk is most likely to the downside:

I think this breakdown in $GS and other financials is the lower probability outcome, but I always like to be open minded. To me, the path of least resistance in stocks, and financials in particular is still higher.

What do you think?

Cheers,

JC

 

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