What's the bear case for equities if Financials start to outperform for the first time in, what feels like, forever?
A funny thing happened this week. The Nasdaq, as well as some of the major Large-Cap US Indexes, were under pressure for a couple of days. But did you realize which which sector was the best performer during that selling?
Financials.
Wait, what? Relative strength in Financials?
Looking at this a little deeper, if Financials were ever going to start to outperform, this would be a perfectly logical place for that to start. In fact, this is exactly where they started to outperform after the Financial crisis:
Click on Charts to Zoom In
The great Louise Yamada often says, "The bigger the collapse, the longer the need for repair". And when it comes to market collapses, the great financial crisis was exactly that. Can you believe that it's already been over 11.5 years of basing? That's a long time.
You'll also notice how I zoomed in on the daily momentum divergence happening simultaneously.
Based on the weight-of-the-evidence, I don't think it's a coincidence that this is all happening at the same time.
When we look at market sectors, we also want to dig into the specific industry groups within the larger sector. "Financials" does NOT mean "Banks". When looking at the Relative Strength of the sub-industry groups, notice how one of these is different from the others:
You'll notice that Insurance is showing a little extra relative strength here compared to its peers. That is most certainly worth noting and we'll get into that more specifically in the trade ideas below.
And quickly, let's remember that there are intermarket implications of financials starting to outperform. To me it speaks to higher rates:
The bear case for equities is a weak one, in my opinion, if Financials are outperforming. This is most likely happening in an environment where equities globally are doing well. Also, Financials also have a much larger weighting in Small-caps than they do in large-caps. That's all part of the "Bear Case Starts With Small-caps" analysis we put together this week.
This Financials outperformance, therefore, would most likely be happening in an environment where equities in general are doing well.
One final point I'd like to make is that a lot of the most important countries around the world are overexposed to bank stocks, and that's part of the reason for their serial underperformance vs the United States, which obviously has a lot more exposure to Tech, Consumer and Communications. So rotation into financials has serious global implications, not just in America.
OK with all that said, let's dig in. Here are some of my favorite names in the group that present a favorable risk vs reward opportunity:
You need to have a subscription to access this content in full.
Log in or
subscribe
