From the desk of Steve Strazza @Sstrazza
Financials have made quite the comeback in recent weeks, with the Large-Cap Financial SPDR $XLF trading back to record highs as bank stocks around the world have fought to repair some of the damage endured during Q2.
We even saw regional banks break back above a major level of interest last week. The importance of this can't be overstated.
But that's just the US. What are financials doing in the rest of the world? Are they confirming this strength we're seeing from the US?
In this post, we’ll provide an in-depth rundown of what’s going on with this critically important sector--not just in the US, but around the globe.
Let’s kick things off with last week’s mystery chart. As always, thanks to everyone who participated.
We asked whether the recent highs were a false start or a failed breakout. The answers were skewed in favor of the bulls, as most of you said it was merely a retest of the previous highs. And it looks like you were right!
Here it is... the S&P Global Financials Index $IXG:
After a multi-year base breakout, buyers just defended the 2018 highs, as former resistance turned into support at this logical level of interest. We want to be buyers of this breakout as long as we're above 76 with a 2-4 month target at the pre-financial crisis highs of 96.
When we consider this in the context of other recent developments, it sure seems as though Financials are on the verge of a new leg higher.
Let’s dig a little deeper and see what’s going on under the hood in this index.
When we take a look at the country breakdown in the chart above, it’s clear that this ETF is being driven by the US, as it represents 50% of IXG.
So let’s start with a long-term view of US Financials XLF:
The structural trend is undeniably higher, as price broke out of a 14-year base earlier this year and is currently trading at record highs. We've been long Financials since February.
Here’s a zoomed-in look now:
Financials have been consolidating at our risk level since May and look poised to make a move higher from here. We want to stay long--but if and only if we're above 38 with a 2-4 month target of 51.
One of the leading groups within Financials have been Broker-Dealers & Exchanges $IAI:
Price recently resolved higher from a continuation pattern, in the direction of the underlying trend. And the move was confirmed by an overbought momentum reading, indicating increasing aggressiveness on the side of buyers.
It’s always a positive to see the strongest areas lead to the upside, and that’s exactly what broker-dealers, exchanges, and capital market stocks have been doing.
But, for this to be a sustained rally from Financials, we also need the laggards to participate.
And we all know where the relative weakness has been… that’s right, the banks. Let’s check in on these stocks now:
After spending most of July trapped beneath former resistance at the 2018 highs, community banks $QABA, regionals $KRE, and money-center banks $KBE have all reclaimed these key levels recently.
Although it’s not shown in the chart, it’s worth noting that momentum was never able to achieve oversold in these ETFs during the recent selloff.
But they still have work to do. Bulls need to take out those year-to-date highs before we can give this industry group the green light.
For now, the fact that banks are back above their 2018 highs is a very bullish development for the market in general.
Here are some of the biggest banks in the US, all rallying higher after resolving from multi-month continuation patterns:
Let's be real: How bad could things be if Wells Fargo $WFC is making new 52-week highs?
Now let’s take a look around the world and see how Financial stocks are faring outside the US.
First we have the Canadian Financial Index $TFFS (in CAD):
Along with the US, Canada has been one of the countries showing leadership when it comes to financials.
In fact, Canadian Financials have been some of the top performers since they broke out of a multi-year base in late Q1, when most risk assets were peaking and rolling over. Buyers followed through with authority, as the index has been grinding higher ever since and is currently trading at all-time highs just beneath our objective of 389.
Next we have one of the most important groups of stocks we’re watching right now. European Financials $EUFN have been the poster child when it comes to international underperformance.
The simple matter that EUFN is back above our risk level of 20 is a big feather in the hat for bulls and global risk appetite.
Bears had their chance to knock prices down but were unable to do so. As long as EUFN remains above 20, the bias is higher for European Financials. The next level we’re watching is those year-to-date highs around 21.25.
And here are some of the largest and most important banks in Europe--Deutsche Bank $DB, LLoyds Banking Group $LYG, and Credit Suisse $CS:
As these stocks have definitely been laggards among global financials, they aren't on the top of our list when it comes to vehicles we want to use to express a bullish thesis.
But the simple fact that they're all above our risk levels can only be a positive for the space. Again, when bears can't even bring down the weakest names and/or groups, that's great information... and it's not bearish.
If we ever want to get cute and go bottom-fishing, we should at least do it in stocks like these, where our risk is very clearly defined. This way, if we're wrong, we're out with little to no harm. So why not take a shot?
After all, if things are headed in the direction it appears for banks, then these stocks could have some serious catching up to do. We've marked their respective risk levels in the chart. We only want to be long above these support zones.
Now let’s look at another country that’s actually seeing leadership from the financial sector. Here’s the Nifty Financial Services Index (in INR) consolidating above a big base and pressing on the upper bounds of its year-to-date range:
We call this a “base-on-base” pattern, and we like to treat these formations as innocent until proven guilty.
The fact that momentum couldn't reach oversold conditions during the latest correction confirms that buyers are still in control, as momentum remains in a bullish regime.
Seeing this index make a decisive move above the February highs would open the doors for a new leg up. We think it happens sooner rather than later.
Now let's take a look at some Financial indexes that continue to struggle below critical levels of overhead supply.
This is the Developed Countries Ex-US Financial Index:
As you can see, price was recently rejected at a critical resistance zone at its former highs. Until we’re above that 125 level, this is just a hot mess.
MSCI EAFE financials look similar, as they’re also stuck in a sideways range:
Same story here; until we see a resolution above those 2014-2015 highs, the bias is neutral at best.
One of the weakest areas when it comes to Financials is Emerging Markets. The MSCI Emerging Markets Financial Index has done absolutely nothing during the last decade. Here’s a look:
Bulls couldn’t even manage to retest their key former highs before rolling over last month. This is NOT an area we want to lean on to express a bullish thesis on financials.
Meanwhile, the MSCI Asian Pacific Financials Index is forming a nice base... but it's still stuck below some serious overhead supply:
If buyers can reclaim that resistance zone around 170, we’d have a nice base breakout on our hands, at which point the bias would be higher for these stocks.
But, until then, we want to stay away as this is another messy chart trapped beneath overhead supply.
So, what's the takeaway when it comes to financial stocks around the world?
Like most areas of the market these days, signals are mixed. The picture is split. There are countries whose banks and financial stocks look good, and we want to be buying. And there are others that are either trapped beneath overhead supply or are just a mess, and we want to stay away from them.
What we can say for sure is that things have been improving for these stocks, as many key indexes have repaired crucial damage in recent weeks. The longer charts like European Financials and Regional Banks stay above our risk levels, the better the chance the 10-year follows and reclaims that key 1.40% level we've been watching. And just imagine what risk assets are doing in that environment...
We'd at least think financials are continuing higher.
Let's dive into some individual names showing strength and offering solid risk/reward opportunities that we can use to express a bullish thesis on the space.
