by Daniel Putnam | May 22, 2014 10:10 am
Is it time to sell financial stocks, or does the bull market of the past five years still have room to run? Right now the fundamentals are telling one story about financials, but market action is beginning to tell another.
Generally speaking, financials are exhibiting strong fundamentals, robust balance sheets, and above-average dividends. Valuations are attractive as well: According to Factset, large-cap financial stocks are valued at 12.7 times 12-month forward earnings — a steep discount to the 15.1 P/E of the broader market. Nevertheless, financials are on track for market-beating earnings growth both this year and next. Analysts are also calling for stronger top-line revenues in 2015: 4.9% for financial stocks versus 4.4% for the S&P 500.
Despite these positive trends, financials have been dead money in 2014. Year-to-date, the Financial SPDR (XLF) has returned 0.41%, trailing the 2.9% total return for the SPDR S&P 500 ETF (SPY). While the charts of most individual stocks in the sector remain strong, one result of this flat-lining is that a few charts in the financial sector have begun to look shaky.
Below are the charts of seven companies from across the sector. Each of these stocks is close to breaking down, but this isn’t a sign to load up on the short side just yet, as all of them are holding their ground. Instead, use this group of charts as an indicator of the health of the broader financial sector. If these break support, the rest of the group may follow.
First up is Citigroup (C), which closed Wednesday at $46.85. The stock has defined support at $45, and a breakdown looks like it could be in the cards given that both its 50- and 200-day moving averages have rolled over. Similar patterns are visible in both JPMorgan Chase (JPM), which has support at $50 and closed at $54.12, and Bank of America (BAC), with support at $13.69 and a current price of $14.61. However, Citigroup stock is closest to breaking down — and therefore the one to watch as the potential warning signal for the others names in the financials group.
The one X-factor in the large-cap bank story is the U.S. Treasury market. Bank stocks shown a clear tendency to rise when the yield curve is steepening (and thus net interest margins are climbing) and fall when the yield curve is flattening. The latter has been the case in 2014, with long-term bond yields falling while short rates have remained pinned. With yields having already fallen so far this year, some help may soon be on the way in the form of a pullback in Treasury prices (and increase in yields). All else being equal, this could be the tonic that provides relief for bank stocks in the weeks and months ahead.
Outside of the large-cap banking sector, several stock charts have formed interesting patterns. Two financials to watch are Goldman Sachs (GS) and Morgan Stanley (MS), which are sitting right at long-term support and, in the case of Morgan Stanley, its 200-day moving average. Both are exhibiting lower lows and the type of bearish triangle formation that usually signifies that future weakness is in the cards.
Both stocks are sound fundamentally, and they’re also reasonably valued — Goldman at 9.2 times forward estimates, Morgan Stanley at 10.1. Still, both charts are indicating that more downside is ahead if these stocks don’t recover soon.
Three other charts stand out right now within financials, and all have a bearish tilt unless they can stage a meaningful rally in short order.
Shares of the asset manager T. Rowe Price (TROW), after having traded sideways since November, have moved very close to their three-year trendline. This support line currently terminates at $78.86, which doesn’t leave much wiggle room from the stock’s Wednesday close of $80.41.
In the brokerage sector, TD Ameritrade Holding (AMTD) is sitting right at both support and its 200-day moving average, meaning that the stock has fallen as far as it can before breaking down:
Finally, we have insurance stock Aflac (AFL). Fundamentally, Aflac stock looks good: Earnings estimates are rising, the dividend is 2.4%, and its P/E is just 9.5 times forward earnings. However, the technicals are telling a different story. AFL is testing support at $60.50, and it is doing so under its 200-day moving average and in the wake of a “death cross” (in other words, its 50-day moving average moving below its 200-day).
All is not lost, however. The small SPDR S&P Insurance ETF (KIE) has printed a nicely bullish chart. While few of the fund’s underlying holdings have the same look as KIE itself, a breakout above its 52-week high of $63.28 would be a positive sign for insurance stocks — and perhaps the financial sector as a whole.
Investors should continue to watch financials closer to see whether they break support or manage to hold their ground.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.
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