Financial stocks have been on fire so far this year.
The XLF financials ETF is up more than 17% on that trajectory, about double the S&P 500’s gains. A shockwave from news of Archegos’ margin call last week didn’t deter the rally in the group.
Matt Maley, chief market strategist at Miller Tabak, said the stocks could succumb to some short-term weakness after that rally.
“They were very, very overbought a few weeks ago,” Maley told CNBC’s “Trading Nation” Tuesday. “If you look at the RSI chart, the relative strength index every week, it’s still pretty overbought. The last three times it was overbought it took a long time to really get off that state and bounce back.”
The XLF ETF is trading at 72 on its RSI, an overbought condition it hasn’t seen since January 2018. Any value above 70 suggests that an asset is overbought.
Still, Maley said the longer-term setup looks incredibly strong for the financial services industry.
“The 50-week moving average is very close to the 200-week moving average. In other words, it gets very close to a gold cross on a weekly basis. Gold crosses tend to be bullish on the charts on a daily basis, but if you get it weekly , that’s even more so. In fact, we haven’t seen any of those crosses since 2012, ”said Maley.
“That time we had also seen a big rally, and when the golden cross took place it expanded into a much further rally in the years to come,” added Maley.
A golden cross is formed when a 50 period moving average exceeds the 200 period. It is a bullish formation that suggests an accelerating upward trend.
From June 2012 to a peak in August 2015, the price of the XLF has nearly doubled. Maley said he would buy the group for weakness while keeping an eye out for a golden cross on the charts.
Steve Chiavarone, portfolio manager at Federated Hermes, also bets long-term strength for financial services. He said rising interest rates and a reopening of the economy should bring even more profits.
“ If you have something that’s as depressed as some cyclical stocks, and the financial numbers were, you can get a big percentage move and still not be back where you were prior to those kinds of crisis events and I think that’s financial business here, ”Chiavarone said during the same interview.
After reaching a peak in February 2020, the XLF dropped 44% to a low in March.
“You get a lot of incentives through the system, there is more chance, and that puts upward pressure on the rates. We see the 10-year level reaching a level of 2% this year, which we think is a very nice further off the yield curve… I think the financial services background is fundamentally still very strong, we would use any weakness to increase our overweight position in that area, ”said Chiavarone.
Disclaimer