After struggling relative to the S&P 500 for a year, Financials have broken support below a declining 50-day moving average, which is now below the 200-day moving average. 

S&P 500 Financials 

Financials have broken support as they remain below the declining 50 and 200-day moving averages. Below the 580 level, there is room down to 520, which is in line with the pre-COVID highs. 

Relative to the S&P 500

On a relative basis, the group remains in a choppy consolidation, but a downside bias remains as the ratio holds below the declining 50-day moving average.

The biggest headwind for the group, in our view, is the flattening of the yield curve. Here we can see that the correlation between the Financials relative performance and the curve has been mostly positive since the end of the Global Financial Crisis.

Industry Trends

As we discussed in our last note on March 29th, the flattening of the curve was likely to be detrimental to the banks. That thesis has largely been playing out as the banks have come under pressure, trading below the declining 50-day moving average and broken support. The group is now below the pre-COVID highs.

Relative to the broader financial sector, the group remains in a bearish trend, below the declining 50-day moving average.

The trends are similar across Large Cap Banks and Regional Banks.

Since our last note, Capital Markets have failed at the declining 50-day moving average. It appears that a large topping pattern has been completed, opening the door to a move to the pre-COVID peak.

Relative to Financials, the group remains a laggard, trading below support and the declining 50-day moving average.

The Insurance subgroup has fallen victim to the overall bearish trend for equities. The index has broken support and the 50-day moving average and is now in a sloppy consolidation.

Relative to Financials, Insurance remains in an uptrend, above the rising 50-day moving average. In this case, outperformance means less bad.

Breadth

The percentage of Financials components trading above their 50-day moving average has moved into washed-out conditions over the past two trading sessions, with consecutive printing values below the 5% mark. There were 194 instances since 2002 where the percentage of Financials components trading above their 50-day moving average was below the 5% mark for a median gain in the sector of 4.69%, with a 65.10%-win rate over the following quarter. It’s worth noting that median gains tended to peak 44 trading days out at 5.96% on an improved 71.35%-win rate. While these results have been attractive, investors with be prudent to note that the sector has broken down below support below a declining 50-day moving average and that opportunities at these levels should be viewed as countertrends.

When this breadth condition was present, the top-performing industry ETF was KRE (Regional Banks) with a median gain of 8.68% over the following quarter with a 68.94%-win rate on a sample size of 161 since 2006. Again, we want to emphasize that opportunities in this space are countertrend in nature at these levels.

Breadth in the space has become a condition of “so bad, it’s good,” and while tempting as it may be for many investors to play a countertrend bounce, risk management remains key at these levels.

See the rest of the note and more in the full report.

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