With earnings season slowing down and all out of the way for brokers and other financials, traders and investors alike can focus more cleanly on the price action in these stocks.
I often highlight the importance of the financials to the major indices like the S&P 500, because well it’s the largest sector. The importance of the financial industry for the whole U.S. economy also shouldn’t be understated. Financials aren’t the only thing to watch nor the only thing that matters — far from it — but a healthy financial sector does help promote and facilitate trade and keeps the capital markets functioning properly.
Before looking at some single-name stocks, consider the below chart of the AMEX Broker/Dealer index, which I divided by the S&P 500. Simply put, if this relationship rises, it speaks to relative outperformance of the broker/dealer stocks vs. the S&P 500; if it drops, it shows relative underperformance of those stocks.
Amid the selloff in the broader market, this relationship has once again retraced to an uptrend that dates back to 2012. In other words, this set of financials has underperformed, and if and when the support line on the chart were to snap, those stocks could continue to underperform. That would have troubling consequences for the broader stock market, so please watch this relationship carefully.
In terms of single-name equities, Goldman Sachs on Monday broke below its 200-day simple moving average (red) for the first time since May 2012, and GS stock is on its way to retest the lower end of an eight-month trading channel. The longer GS stock remains below or around its 200-day MA, the higher the chances that the stock is changing its character for the medium term. Ergo, it will no longer be as simple as buying the stock on any pullback.
In general, the big difference between this current selloff in the broker stocks and other mean-reversion moves during the past 12 months is that this one is steeper, came with more velocity and ferocity, and came from a meaningfully higher high and more extended price levels. Thus, it has a better chance of leaving a more bearish mark on the charts and leading to a more meaningful mean-reversion move lower and relative underperformance of the broker/dealer stocks than we have seen in some time.
The most important takeaway? Watch the relationship between these financials vs. the broader market indices closely, because if these stocks continue to be slippery, it will be difficult for the broader market to rally.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.