Financials Attempting to Break Out

Financials have underperformed the S&P 500 this year, but that might be about to change. The sector represents a large weighting in the Small-Cap Russell 2000 index. If Financials can pick-up strength soon, it would likely help lift small-cap stocks, which would be a big positive for the broader market.

Below is a great breakdown of the Financial Sector from @MacroCharts on Twitter.

Let's take a closer look at all four charts.

First, we have a ratio chart of Financials vs. The S&P 500 ($XLF/$SPY). When the line is rising it means Financials are outperforming the S&P 500 and vice versa. @MacroCharts points out that the ratio is attempting to get above a declining 200-day moving average. In addition, it looks like it's formed a bottom, similar to the one in 2016, which preceded a sharp reversal higher.

Second, is a chart of the KBW Bank Index, $BKX. As you can see, price is above a rising 200-week moving average and trying to break out of the downtrend it's been in since January 2018.

Next up we have Berkshire Hathaway, the largest component in the Financial Sector ETF, $XLF. This chart shows the A-shares ($BRK.A) but the B-shares ($BRK.B) look nearly identical. @MacroCharts notes that price is "wound up," or coiling into a triangle. You can think of this price action like the tightening of a spring. As the range continues to contract, energy builds up within the spring. When one of the pressure points is eventually removed, the spring will explode in that direction.
Lastly, we have the second-largest component in $XLF, JP Morgan Chase ($JPM). It's attempting to break out to all-time highs after forming a massive two-year base. Remember: "The bigger the base, the higher in space!" 

Earlier this week, Greg Krupinski and David Keller were also pointing out the tasty chart setup in $JPM.

It's important to note that the Financial sector has yet to break out above last year's highs. However, when you drill down into some of the individual names within the sector, you'll find plenty of attractive setups. A breakout in Financials would be one of the last boxes to be checked off on the bulls checklist. We'll continue to keep an eye on this and report back with any significant developments. As always, feel free to contact us with any questions.