Financials Showing Potential

In the last week, one area that has seen strength (and a lot of attention from traders and investors alike) has been Financials. This sector is commonly regarded as one of the most important in the market, given that it is a 13% weighting in the S&P 500 ($SPX) and an 18% weighting in the Dow Jones Industrial Average ($DJIA). Thus, if it can show some sustainable strength, this would bode well for stocks as a whole.

Julius de Kempenaer brings to our attention that Financials ($XLF) have now reached the leading quadrant on the Daily RRG:He also makes two points about the actual price chart:

1.) The sector is now moving above previous resistance from Q4 of last year, around the $27 area, and...

2.) The relative strength in Financials is picking up, breaking the downtrend it has been in since mid-January.

However, while some may consider this an inverse "Head and Shoulders" pattern, Julius does not see it that way, stating "one of the most important requirements for an inverse H&S to be legit is that it needs to be formed at the end of a trend; with a pattern that stretches over a period of seven months, that would have to be a big (down)trend. That is not the case here."

Mark Newton also mentioned the breakout in relative strength from Financials in a recent note. Below is another example of $XLF versus $SPX:Zooming out a bit, Chris Ciovacco shows that this relationship between Financials and the broader market is bouncing off the lower range of a multi-year channel, going back to 2011:As for individual names, Greg Schnell pointed out a few Bank charts that have been acting well as of late, namely JPMorgan ($JPM), Goldman Sachs ($GS), and MorganStanley ($MS):Outside of Banks, another area that is setting up for potential new highs are Broker-Dealers & Exchanges ($IAI):CBOE ($CBOE) is one component that has already begun to make a strong move to the upside:While it may be early, we are certainly seeing a lot of strength in the Financials sector. The major SPDR ETF, $XLF is breaking to new highs and lots of positive developments are occuring beneath the surface, particularly among the Banking stocks. If Broker-Dealers can manage to breakout as well, this should add to the bullish momentum we have already seen.

Thanks for reading and feel free to contact us with any questions or feedback!