Monday kicked off with a broad rally which largely proved to be an exact opposite move of what markets have engineered over the last few weeks. Financials, Energy, Industrials and Materials were all quite strong, while Technology was largely absent from the rally until the last couple hours.
Similar to last week’s gains, seeing lopsided participation out of the Cyclicals while Tech is largely absent does not equate to the market being vulnerable. Conversely, if late 2021 taught us anything, it’s that Technology is perfectly capable of carrying the load while other sectors aren’t participating. Bottom line, what’s truly important to have more confidence about the longevity of this bounce is to see many of the cyclicals fully recoup their weakness from early February.
At a close of 3951.56, SPX is close to joining NASDAQ in being positive for the month of March at a time when sentiment has grown the most pessimistic in nearly six months. DJIA and SPX have largely ground sideways over the last couple weeks, while Technology has helped the NASDAQ strengthen enough to recoup more than 50% of the drawdown since early February.
Overall, a push above last week’s SPX highs at 3964.46 looks likely, and should drive SPX up to 4025-50 in the short run. DJIA likely advances up to test the all-important $32500 level, and both indices likely could face some resistance at those levels.
To expect that SPX is “in the clear”, we’ll need to see rallies get back over prior intra-day peaks from 3/6/23, which lies at 4078.49. If/when this occurs in the weeks to come, this would be the technical catalyst that could help SPX accelerate to test last August’s highs.
Until that time, the rally has largely been Technology and Metals dominated with some outsized movement in cryptocurrencies. Initially, seeing stabilization in both Healthcare and specifically Financials will be imperative to helping this rally begin to show some better near-term momentum.
As shown below, the area of downtrend line resistance lines up with early March peaks at SPX 4078, making this a much more relevant upside area of importance than the ability to recover above a 200-day moving average.
Financials as a sector, has fallen to test important support vs. S&P 500
While the recent drawdown in Regional banks has proven quite damaging to intermediate-term trends and momentum in many smaller banks, it has resulted in Financials as a sector pulling back to the first important area of support in relation to the S&P 500. I expect this should result in stabilization, followed by a rally post this week’s FOMC.
Reasons for optimism have to do with three important concepts: 1) Ratios at/near strong support 2) Oversold conditions and 3) DeMark counter-trend exhaustion.
Below we see ratio charts of Invesco’s Equal-weighted Financials ETF (RYF) relative to Invesco’s Equal-weighted S&P ETF (RSP 0.44% ) This recent Banking crisis has caused a strong enough pullback to retest lows made three years ago at the March 2020 low along with lows made back in 2011.
Thus, while the intermediate-term deterioration in momentum within Financials is troubling, I don’t suspect recent weakness will continue unabated. Oversold rallies look likely for Financials, and should begin to happen post FOMC meeting results on Wednesday.
KRE on absolute charts looks close to bottoming; Yet, a final pullback over next 1-2 days cannot be ruled out
While the news in recent days continues to be alarming about banks and the possibility for a credit crunch given the slowdown in deposits given lack of confidence, it’s likely not going to prove to be one-directional.
Traders might realize that triangle patterns following lengthy downtrends complete with “open gaps” often can bring about meaningful trend reversals following a recent decline.
Hourly charts of KRE help to understand the recent price action of Regional Banks which has largely ground sideways in recent days amidst a plethora of bad news and upgrades and downgrades for many Banks.
Triangles of the sort shown with KRE 0.84% don’t have to be necessarily bearish. However, normally then can allow for a “final” pullback to unfold which normally happens on far lighter volume and fewer stocks hitting new lows. Then a rally ensues. I’m expecting this very well could get underway this week.
Bottom line, movement down under last week’s lows should represent a long trading opportunity for those looking. Conversely any breakout back to new weekly highs is also something which looks likely to extend. The next few days should present opportunity for those looking.
Insurance stock outperformance is still ongoing vs. Regional Banks- This looks to continue until April and then likely reverses
At present, many sub-sectors within Financials have shown sharp breakouts vs. the Regional bank sub-industry. Insurance and Investment Brokers look like two of the main groups which have managed to outperform strongly over the last couple weeks.
While ratio charts of IAI 0.74% vs KRE 0.84% and KBE 1.26% has gotten stretched, the SPDR S&P Insurance ETF, KIE 0.46% , still looks quite attractive and should still outperform in the days/weeks ahead.
Thus, while Insurance is definitely a more defensive way of playing Financials, KIE’s recent relative breakout vs KRE still looks quite early to peak out.
Bottom line, Insurance should be a sub-group to favor to outperform Regional banks as a group between now and April. However, the entire Financials space seems likely to stabilize and rally in the days to come. Technically speaking, however, it might not be Regional Banks that are as strong as other areas within the Financials sector just yet. Stabilization in KRE is imperative for this group to work well, and I expect to see signs of that emerge this week.
Check out my 3/20/2023 CNBC Interview HERE.
