Wednesday, October 13, 2010

"Financials Ready to Join the Party?" (XLF; C; BAC; GS; JPM; MS)

From Market Talk:
Financial stocks have largely sat out the September and October stock market rally. But with JPMorgan kicking off bank earnings this morning, will financials join the party? Chart watchers are cautiously optimistic. Here’s my latest “Technically Speaking” column for the wire:
While financial stocks have missed much of the broader market’s recent rally, chart watchers are cautiously optimistic that the underperforming sector may be poised for a breakout.
Financial stocks have been the worst-performing sector in the Standard & Poor’s 500-stock index over the past three months, gaining only 3% compared to a 9.4% rise for the S&P 500. It is a surprising development considering that bank stocks have been big drivers of the broader market for years.
But the financial sector’s weak results may be set to change, especially as bank earnings have kicked off, the midterm elections are on the horizon and amid high expectations that the Federal Reserve will inject additional stimulus into the economy.
The SPDR Financial Select Sector exchange-traded fund (trading symbol XLF), a closely watched proxy for bank stocks, is sitting at the top of its five-month trading range. It was also recently trading just above its 200-day moving average, which is viewed by many as a dividing line between bull and bear markets. The XLF has traded between $13.40 and $15 since May, but the trading has been choppy within this relatively tight range.
John Schlitz, chief market technician at Instinet, said the ETF has failed to move above $15 during its last five attempts over the past five months. It keeps facing resistance from the ETF’s 200-day moving average at that level, which have kept gains in check.
The XLF was recently up 14 cents, or 0.9%, to $14.98, which is above the 200-day moving average of $14.86. Holding above this level would be a key development for banking bulls.
“If we get a moderate push from here, you’ll not only take out multiple highs, but you’ll break the 200-day moving average which should build enough confidence from a technical perspective to take the ETF to $15.70,” Mr. Schlitz said.

He also finds comfort in the fact that recent pullbacks over the past month have found support at the ETF’s 50-day moving average of $14.36.
But Mr. Schlitz cautioned that any breakout should be viewed cautiously for a couple of reasons. The broader market’s run-up could be due for a near-term pause, which could limit gains for the financial sector. And a break above the 200-day moving average for the XLF will be validated only when the ETF trades down and hits it as a support level....MORE
For a graphic depiction here's Bespoke Investment Group:
Relative Strength: Consumer Discretionary and Financials
 ... Financials, on the other hand, have gone nowhere but down and are now at their lowest levels in terms of relative strength in the last year.