Thursday, September 10, 2015

The One Market Sector That Really Matters Right Now (XLF)

If you had to have only one indicator of where the equity markets are heading, right now this is probably it. For different stages of a bull market there are different indicators that work best.

Early and late stage bulls must have the financials participating. In the middle speculations and lottery tickets confirm where you're at.

Back in the day, you could trust the brokerage stocks to indicate where the broader market was going to be in, say, three months.

That's not so true anymore, the brokers as a group got merged out of existence, but using their devil-spawn, the Citi's and BAML's you have an indicator that ranges from coincident to maybe a two week heads-up.

From FinViz, the one we watch, the S&P Financial Sector ETF, $23.01 up a dime last:

XLF  The Financial Select Sector SPDR Fund daily Stock Chart
And a megabank shall lead them. So if the train and the bus are going to the same place, get on board.
From Barron's The Striking Price column:

Big Bank Stocks Are a Buy
Sure, low valuations and (potentially) rising rates make JPMorgan, Citi, and others attractive. Another reason: Loose money in Europe.
The financial sector is moving back to the stock market’s sweet spot, but not only for the compliance-approved reasons emanating from Wall Street’s research analysts.

Sure, banks are reasonably priced after the recent correction, and banks would benefit from an improving U.S. economy and rising interest rates. But some senior traders like bank stocks for a much more speculative reason: They think the European Central Bank may announce another round of quantitative easing to ward off global economic weakness that could be caused by China’s economic woes. 

Bank analysts have difficulty expressing that point because they are required by compliance departments to focus on what they know: stock valuations. 

But many traders say the reason to buy bank stocks is not that prices are cheap — as they have largely been since the credit crisis of 2008. The reason to buy bank stocks is that Europe might initiate another round of the QE trade even as the Federal Reserve raises U.S. rates. 

“It’s the latest heroin trade,” a top bank stock trader said Wednesday. “Everyone is afraid the Fed is about to stop acting as the market’s chief heroin dealer and they want someone else to keep dealing.”

Last week, Mario Draghi, the ECB’s president, said he was prepared to lower interest rates if needed, but not just yet. 

Since last week’s ECB meeting, many U.S. banks benefited from bullish research reports extolling their low stock prices and bright prospects. This has boosted investor interest in Bank of America (ticker: BAC ), Citigroup ( C), Goldman Sachs ( GS ), Wells Fargo ( WFC ) and other major banks. A cynic might note the same valuation conditions have largely existed for the past nine years. (To be fair, banks finally seem to have paid the bulk of their fines for bad behavior leading up to the crisis.)

Still, the heroin trade has some appeal, especially since China’s economic woes cast such a large, opaque shadow over the global economy. It is hard to know if the world can shake off China’s weakness or if more easy-money policies are needed. 

“The ECB is the only central bank with enough dry powder,” a trading executive at a big American bank said.

Investors interested in establishing positions in the financial sector, or increasing current exposure, can consider a two-part “heroin trade” on the Select Sector SPDR-Financial ( XLF )....MORE
DJIA          16,335
S&P    1952.59