Broker-Dealers Break Out

From the desk of Steve Strazza @sstrazza and Louis Sykes @haumicharts

In a recent post discussing cyclicals, we posed the following question:

Are Energy and Financial stocks about to lead the market?

Cyclical groups are catching all the right tailwinds in this environment.

Crude Oil and Yields are pressing to new 52-week highs as investors continue to favor more economically-sensitive stocks and commodities in general. This is a bullish development and supports higher prices for some of the most beaten-down risk assets... even Financials and Energy.

As participation has expanded, we've been vocal about looking for the winners in each group without a sector bias based on relative strength.

The reason for this is simple... In a market where everything seems to be trending higher on an absolute basis, we want to put less emphasis on looking for leadership groups and instead keep our options open and find asymmetric risk/reward opportunities across the entire market.

In today's post, we're going to focus on the Capital Markets Industry. It's not just offering favorable long setups at both the Industry and component level - which we'll discuss below - but as a kicker, it's also an area of relative strength.

Before we dive in, let's set the stage quick with some recent developments from the Financial sector that have us bullish on the entire space.

Here's the SPDR Select Financials ETF $XLF.

XLF recently reclaimed its 2007 record highs and is currently trading at its highest level in history. After several tests of this key level since 2018 (shown in the chart above), we think this breakout is finally the real deal as we're seeing confirmation in the form of a breakaway gap and overbought momentum reading.

As long as XLF is above 31, the bias is higher and we're owners with a target of 40.

This massive base breakout for Financials makes sense in an environment where rates are pressing back to their highest level since this time last year.

Although, things look much different for XLF on relative terms as the primary trend is lower... or sideways, at best.

With that said, the ratio just successfully tested and rebounded off its all-time lows vs the S&P 500 from all the way back in 2009.

We've been saying this since last year and continue to believe this is a perfectly logical area for Financials to begin outperforming the broader market.

Here's another look at the long-term relative chart.

When we zoom in the picture is a lot different though, as XLF/SPY is just a stone's throw away from resolving higher from a 12-month base.

Here's a look.

Will the failed breakdown and bullish momentum divergence at this critical support level give Financials the spark they need to break out vs the S&P? We think so.

But today we're going to drill into one of the Financial sectors' secular leaders, the Broker-Dealers & Exchanges Industry $IAI. The chart below does a fine job at illustrating this long-term leadership.

Notice how unlike XLF, this group of stocks had already eclipsed their pre-financial crisis highs several years ago. Last years' selloff shook prices below that key 58 level, but the group recovered swiftly and has more than doubled in the roughly one year since.

Now here is IAI.

Price peaked and reversed at our primary objective of 86 in early January, and after consolidating constructively for 4-5 weeks, just ripped right through that key level to close out the week at fresh all-time highs. Our risk is very well-defined at those prior highs so we like this ETF a lot as a vehicle to bet on the uptrend in Financials.

As long as IAI is above 86, we're buyers with a target of 130 over the next 1-year+.

Here is a look at Broker-Dealers, Exchanges, and Capital Markets on both a cap-weight and equal-weight basis, relative to their Financial Sector peers.

Both of these ratios are showing bases, breakouts, and uptrends to new highs. It's clear that this is where the relative strength is within Financials.

Now let's dive in and check out some of the strongest individual names driving this outperformance.