The financial sector of the S&P 500 has been lagging all year, and has thus held the S&P 500 from rallying so far in 2015.
Click to Enlarge Financial stocks — like those represented by the Financial SPDR (NYSEARCA:XLF) — are an important part of the U.S. economy, and make up about 17% of the S&P 500. That makes financials the second-largest sector behind technology — though the tech sector is largely influenced by Apple Inc. (NASDAQ:AAPL) and its enormous market capitalization.
So, considering the heavy importance of financials in the S&P 500, it’s difficult for the index to make a trending move higher without support from banks, insurers, brokers and other financial stocks.
Winning traders know that the quickest path to profits is the path of least resistance — wherever trends can be found. So, one of the most revealing ways to look at the markets is by looking at things in relative terms, which is where we can uncover relative strength and relative weakness trends.
Through a technical lens, the XLF is down about 2% year-to-date while the broker-dealer segment of the financial sector is up around 2% in 2015, and therein lies the opportunity.
On the chart above, we see that broker-dealers — a group that includes Goldman Sachs Group Inc (NYSE:GS), Morgan Stanley (NYSE:MS) and Charles Schwab Corp (NYSE:SCHW) — is also exhibiting notable relative outperformance vs. the S&P 500 year-to-date.
This is where we’ll start our hunt.
Financial Stocks to Watch: Goldman Sachs Group Inc (GS)
Click to Enlarge Arguably the most prominent broker-dealer in the financials space is Goldman Sachs Group Inc (NYSE:GS), whose stock price also carries a good amount of weight as far as sentiment for the sector goes.
Goldman is jokingly said to be run by magicians given the vast profits they seem to reap quarter after quarter, and this inherent allure to the forces at work at GS, from a sentiment perspective, is at least in part what makes it an important stock to follow.
Looking at the GS stock price through an 18-month lens, we see that bigger-picture price movement continues to be to the upside, and in a fairly stair-step way. After GS stock broke past its diagonal resistance line in August of last year, it has re-tested this line twice since — once in October and again in late January/early February. The rally off the February lows was powerful and has led to a constructive-looking consolidation phase since, which is taking place just below the late 2014 highs.
If these broker-dealer stocks are going to continue showing relative strength — and if the broader market has one more rally left in it — then GS stock would be a prime candidate to move higher.
Target the $204-$205 area, which more active traders can play via options.
Financial Stocks to Watch: Morgan Stanley (MS)
Click to Enlarge Another bigwig among broker-dealers Morgan Stanley (NYSE:MS). Just like Goldman Sachs, many traders and active investors look toward relative strength in MS stock for a hint to strength in the broader stock market.
Like many stocks in 2014, MS spent most of the first half of 2014 chopping back and forth, but it did manage a 20%-plus rally in the second half — most of that in Q4.
In the bigger picture, there are two supportive technical matters to be aware of:
- The late 2014 rally pushed the stock marginally above its 2009 reaction highs, where broadly speaking, the stock has been consolidating since.
- MS stock continues to hold its 2012 support line and respect the rising 200-day simple moving average (red line), which from a sentiment perspective is important.
Over the past month-and-a-half, MS stock has been trading in a somewhat choppier and tighter trading range than usual, and while it’s still stuck in this range, this churning is actually supportive of another push higher.
On the next leg up, Morgan Stanley should be able to at least revisit its late 2014 highs just north of the $39 area — another 8% higher.
Financial Stocks to Watch: Charles Schwab Corp (SCHW)
Click to Enlarge Securities brokerage and diversified financial services firm Charles Schwab Corp (NYSE:SCHW) is another financial stock that has shown great resiliency over the past 12 months.
While SCHW stock is not as closely monitored for relative strength/weakness as Goldman Sachs or Morgan Stanley, it’s still important to watch because of its broad retail and institutional client base.
From a price action perspective, it’s hard to find a financial stock that has shown sharper bullish reversals (i.e., it has bounced off the bottom of its respective trading range) than Charles Schwab. Looking at the price action since last October, each time SCHW stock dropped, it rallied back up a nearly equally violent manner, which speaks to the strong support that the stock has underneath it.
The most recent price action since mid-March has seen SCHW bounce off the $29 area, which currently coincides with the stock’s 100-day simple moving average (blue line) — a sign that the stock might be ready to push higher soon.
Tactically, if SCHW stock were to see a daily close below the $28.50 area, it might see more weak price action, and traders would need to wait for the next bullish reversal to get in. Otherwise, if the stock can push past the $30.50 area, a move into the $33-$34 area looks probable.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
