We’re seeing rotation into the cyclicals this month, and no cyclical sector is larger or more important than the Financials.
It wasn’t so long ago that Financials were at the epicenter of a crisis, when Silicon Valley Bank and Signature Bank of New York both were taken into FDIC receivership. In the weeks before the banks failed, it looked as though the sector was set to lead the next stage of the stock price recovery. In the weeks that followed, though, Financials suddenly found themselves at multi-year lows compared to the S&P 500.
Now, the sector is finally challenging its pre-SVB highs again.
It wasn’t that long ago that Financials were sitting near multi-year relative highs. Tech stocks led last year’s declines, and value plays led the rebound from the October lows. At year-end, the ground began to shift in favor of the beaten down growth names, and then SVB’s failure in March sparked a selloff that pushed Financials to the bottom of the performance derby.
The question is, when will the money rotate back to the Financials?
We’ve taken a cautious approach to Financials since the banking turmoil in March took the sector from ‘breakout watch’ to multi-year relative lows in just a few days’ time. They haven’t been able to staunch the bleeding since then – Financials keep drifting closer and closer to their 2020 lows when compared to the S&P 500 index.
On the bright side, 14-day RSI has not yet re-approached the lows it set at the height of the banking crisis. Unfortunately, prices have done nothing to confirm that potential bullish momentum divergence. The ratio keeps drifting lower, and we have no reason to bet on a big bullish reversal until we see clear evidence otherwise.
On an absolute basis, we’re encouraged by the sector’s ability to remain above support from the pre-COVID highs. If you’ve been reading our reports, you know that those highs coincided with peaks set in 2007 and 2018. We can’t think of a more important level to hold.
You might have heard, but there was a bit of turmoil in the financial markets last month. Two S&P 500 banks were placed into receivership with the FDIC during March, driving Financials to the bottom of the barrel when it comes to year-to-date sector returns.
The Financials sector is one to watch closely, as it could be one of the best sectors in 2023. We’re maintaining our rating for now, but a break above the relative highs from 2021-2022 would likely spark an upgrade.