Trouble Ahead for Financials?

The Financial sector is the third largest sector in the S&P 500 and its components are vital to the health of the US economy. Lately, there have been some top technical analysts warning about the bearish charts within the Financials.

JC Parets is a CMT and founder of All Star Charts, a technical analysis research platform. Recently, he’s been writing about the weakness he’s expecting from the Financial sector. In a blog post titled It’s "The 50 & 57 Market!", Parets cautions that Regional Banks and Broker-Dealers are two subsectors of the Financial sector that are at critical levels. He explains that both are back to the same levels they peaked out at back in 2007, leading to the Great Financial Crisis. Below is a tweet from @allstarcharts.

Another chart keeping Parets bearish on Financials is in the chart of JP Morgan ($JPM.) The stock is the second largest holding within the Financial sector behind Berkshire Hathaway. In a blog post titled “The J.P. Morgan Dilemma,” Parets uses several charts across multiple timeframes to illustrate why he thinks the stock is headed lower. He points out J.P. Morgan is highly correlated with the S&P 500. As a result, weakness in the stock would suggest weakness for the overall market. Below is a chart from the post that he uses to explain this.

Carter Worth is head of technical analysis at Cornerstone Macro and frequent guest on CNBC. He made an appearance yesterday on Fast Money where he suggested traders fade any strength in the Financial sector. He explains that the Financial Sector ETF ($XLF) has recently broken its uptrend support line. In addition, he highlights the relative underperformance of Financials to the broader market. He ends the segment by stating unequivocally that “he’s a seller” Below is one of the charts that Worth used to support his argument. You can watch his segment on Fast Money here.

Financials have rallied along with the broader market in the past few weeks. They’re up about 14% from their December 2018 lows. Despite the recent strength, many of the smartest analysts are warning traders to have a cautious outlook on the sector.