The pre-Labor Day weekend mood on Wall Street was tentative as investors awaited the latest jobs report. And while the number that came out may not have been exactly what Americans were hoping to see, it was close to perfect from a pure investment point of view.
A total of 151,000 jobs were created in August, which was below the expected 180,000. And with the number close to expectations, but not too far below, Wall Street is now taking the status quo of a Federal Reserve forced to keep interest rates low for the time being.
The odds of a September interest rate hike now stand at a one-in-five chance. The only other meeting the Fed has in 2016 is in December and those odds did not change much after the report. Before the number was announced there was a 57.6% chance, and heading into the long weekend it was slightly lower at 56.1%.
So with the Fed poised to stay quiet at least for a couple of months, the next catalyst to move the market is likely to come from economic data or election rhetoric. In the meantime, the lack of big events on the calendar should up a clear path to higher stock prices in the next few weeks.
I spent part of my long holiday weekend scanning exchange-traded fund charts to identify the sectors and asset classes that will be the best positioned in the coming weeks, and the one I wanted to talk to you about today is the financials.
While the financial industry has been lagging the S&P 500 so far in 2016, the sector ETFs have been on roll since the Brexit selloff and have actually outperformed the broader market. The recent upswing has been driven by the reality that a rise in interest rates is inevitable, and many still believe we’ll see the first hike before the end of the year.
Both large companies and smaller regional banks stand to benefit from a rise in rates, as the ability to borrow money cheap and then lend it out at a higher rate would increase margins and generate more profits.
There are two ETFs I’m looking at here. The first is the Financial Select Sector SPDR ETF (NYSEARCA:XLF), which is made up of larger financial firms. I was pleased to see the ETF hold up well on Tuesday, pulling back just 0.2% as the yield on the 10-year Treasury dropped to 1.54% after the long weekend. The second is the SPDR S&P Regional Banking (ETF) (NYSEARCA:KRE). The smaller regional banks that make up this ETF were hit harder on Tuesday, closing the day with a loss of 1.8%.
The inevitability of higher interest rates makes the long-term potential of each of these ETFs very bullish. Still, the pace at which rates will increase will be slow and investors should not expect a straight move to the upside. As always, there will be day-to-day volatility, especially when trading ETFs.
I believe the best strategy to play the strength in financials is to wait for short-term pullbacks in both XLF and KRE. Regarding the former, I’d suggest looking for weakness that pushes the ETF back down to the $24 area. And for KRE, there appears to be good support between $41 and $42, so look for a buy signal at that level.
Matthew McCall is founder and president of Penn Financial Group, an investment advisory firm. Matt also is Editor of FUTR Stocks and the ETF Bulletin. Earlier this year, Matt and Hilary Kramer teamed up on Breakout Stocks where Matt serves as the Co-Editor. Most recently, Matt and Hilary joined forces again. This time, they are helping individual investors make money trading ETFs. For more on their latest project, visit www.etfedgesummit.com.
