Again with the Financial Sector?

Last night, I featured junk bonds (JNK). As it has been underperforming, I wanted to give a head’s up in case it failed a key support area. However, it not only held over the 101 area, it rallied to close up .97%.

With risk appetite still a thing, I turn back to the financial sector now that earnings season has begun. Notably, JP Morgan (JPM) reported well with a surprise lift from auto loans.

Wells Fargo (WFC) did not do so well; they have had issues with fake accounts and large fees and are the only bank that could not stand the recent bank stress tests. They were already required to lower dividends, so today’s poor results leading to a huge dividend reduction is not healthy for that bank.

Nevertheless, with more banks to go, the Financial ETF (XLF) closed well.

The banks that have an investment arm are projected to do better. With the rollback of the Volcker Rule, Bank of America (BAC), Morgan Stanley (MS), and Citicorp (C) – the big banks – are allowed to invest money in equities. Although I have yet to see evidence of it, that deregulation can help spur profits for the banks as well (assuming the market does not fall apart).

Looking at the ETF XLF, it has entered a better phase, going from bearish to recovery. This is key to the whole market picture right now. If XLF and the big banks can hold up or, even better, remain positive, it’s possible that money will rotate out of tech and into the financials in the next few days. That is a better story for a projected improvement in the economy for the 4th quarter and beyond.

The market is forward thinking.

  • S&P 500 (SPY): When gaps get filled, especially ones that leave an exhaustion island, pay attention
  • Russell 2000 (IWM): 137 support, 146.00 resistance
  • Dow (DIA): Unconfirmed accumulation phase – needs to confirm
  • Nasdaq (QQQ): Reversal top did not confirm – so there
  • KRE (Regional Banks): 34.00 key support
  • SMH (Semiconductors): 160 pivotal
  • IYT (Transportation): Very encouraging move in this sector; 173 resistance
  • IBB (Biotechnology): Good comeback
  • XRT (Retail): 43.40 pivotal
  • Volatility Index (VXX): Unconfirmed bullish phase, did not confirm
  • Junk Bonds (JNK): 104.50 resistance, 101.50
  • LQD (iShs iBoxx High Yield Bonds): 134.90 support key

Mish Schneider

Director of Trading Research and Education