All About the (Unloved) Banks

This past week the Financial sector did the heavy lifting. The financial ETF (XLF) far outperformed the main ETFs in technology, industrials, materials, energy, biotech… you name it.

I consider this surge a significant development; one that bodes well for higher prices in the major indices, even though financials comprise the most unloved sector in the S&P. Here’s the backstory.

In the midst of the market carnage back in February I noticed a “morning star” candlestick pattern on the daily chart of the financial ETF (XLF). It took a while for the upside momentum to ignite, but on March 1st the XLF crossed another key resistance level at $21.50 and it was game on

To be sure, as indicated by the accompanying chart, not all is well with the financials. The 6-year rally off the 2009 bottom fizzled in July of 2015 at $25.62 and the sector has yet to reclaim those highs. Few would have predicted that the S&P 500 could be within a few percent of all-time highs without the full recovery of this sector, but that’s the nature of the New Market. It is different this time.

Financials remain something of a pariah; as a group they are among the most mistrusted companies in America, perhaps because they have been so reluctant to admit wrongdoing and change policies. This week the Fed identified 5 major banks as too big to fail and also labeled them unprepared for a crisis and in need of supervision.

Nevertheless, despite declining revenues and increased write-downs, Bank of America (BAC) and J.P. Morgan (JPM) were up 9% and 7.5% respectively over the last 3 trading days. Investors are looking across the darkened valley to brighter days ahead. Moreover, these numbers are about double the performance of the ‘FANGs’ over the same period.

Bottom-line: If the banks are alive and well, the market will be, too. One more reason to stay long and buy dips.

www.daytradingpsychology.com/mastermind  (Peak performance coaching for private traders)

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