After recovering from an initial dip to start the year, the Financial SPDR (NYSEARCA:XLF) has fought its way back to a marginal gain of 0.86% for 2016 to date.
This reflects a bit of improvement given that the performance of this major benchmark has actually been down 4.9% over the past 12 months.
XLF tracks the performance of heavyweights in the U.S. Financials segment and is a cap-weighted “S&P 500-only” portfolio, meaning that it gravitates toward the largest players based on market capitalization.
With this in mind, we’ll look at three financial stocks in the investment arena and determine if select opportunities exist in an effort to take advantage of recent strength in the overall sector.
Financial Stocks to Watch: Goldman Sachs Group Inc (NYSE:GS)
Goldman Sachs Group Inc (NYSE:GS) operates as an investment banking, securities and investment management company worldwide. Its four units include investment banking, institutional client services, investing and lending and investment management.
Over the past year, GS has been notorious for trapping bullish investors with false rallies. Each mirage has been met with sudden and potent moves to the downside, taking the stock from just above $200 per share all the way down to sub-$140 at the low.
But perhaps the mood has shifted, given the broader market’s recent climb to new highs and GS trading at what investors could perceive to be a “discount” level.
In mid-July, GS broke up and through the downward trendline that had been a source of problems for the bulls in the past. If shares can rise above the April highs, the stock may prove to be in the early stages of a major bullish trend reversal.
Using the Profit Scanner powered by Recognia, investors were first alerted to underlying strength materializing in the stock when a bullish event emerged on July 8, informing us that positive developments were taking place in the Moving Average Convergence Divergence (MACD) indicator.
The MACD shows the relationship between two moving averages of prices and is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average — called the “signal line” — is plotted on top of the MACD to show bullish and bearish signal points.
A bullish signal is generated when the MACD rises above the signal line, or above zero. A bearish signal occurs when the MACD falls below the signal line, or below zero. And, at the time of this event, GS closed at $150.38 for the day.
Two more events took place on July 12 and July 15, reflecting bullish momentum when price initially crossed above its 50-day moving average and then above its 21-week moving average, respectively.
With GS now trading for about $165, investors who took action on the initial buy signal are sitting on gains of up to 9.86%.
But since we’re focusing on Profit Scanner’s intermediate-term outlook, this type of move could be just the beginning of a bigger-picture price recovery. Major resistance will not be met until shares hit $190, a level that repelled the bulls toward the tail end of last year.
Financial Stocks to Watch: Morgan Stanley (NYSE:MS)
Morgan Stanley (NYSE:MS) provides various financial products and services to corporations, governments, financial institutions and individuals internationally.
Over the past year or so, shares of MS have been on the slide. A disastrous January and early February sent the price spiraling from the low $30s down to about $20. And while GS has been pushing higher, it has taken roughly six months to reclaim those early 2016 losses.
Those in the bearish camp would argue that price is due for another setback, as Profit Scanner finds major resistance at $33.77 per share. With the current price of MS at $30.25 and downside support at $25.85, it would appear that the risk-to-reward ratio lies with the bears.
But that whole argument goes away in the event the bulls are able to push beyond $33.77 with conviction.
Financial Stocks to Watch: Charles Schwab Corp (NYSE:SCHW)
Charles Schwab Corp (NYSE:SCHW) is another company in the financial services sector, providing wealth management, securities brokerage, banking, money management, custody and financial advisory services.
Following a wide-range price swing between December and early February, shares of SCHW had traded in tightening fashion. In other words, it appeared as though a technical Symmetrical Triangle pattern was developing in preparation of a major breakout — the trajectory unknown until a move outside the price formation confirmed direction.
However, recent price activity appears to have broken the stalemate to the upside, giving investors going long the stock something to cheer about. Although there are new investors joining the bullish chorus attracted to analyst price targets and the recent 2.25% increase in institutional ownership of the stock to 80.50%, Profit Scanner had issued its own series of bullish alerts going back to July 8, when there were two positive events (Outside Bar and Engulfing Line) in play. The stock closed at $25.73 at the time of these alerts, and had investors acted, they would be sitting on gains of up to 17.25% based on the current price of the stock at $30.17.
However, investors should be cautious at current levels, as SCHW is currently kissing longer-term resistance at $30.23. Assuming this strategic level is taken out, we could then see shares begin to move toward their 52-week high of $34.52.
Profit Scanner powered by Recognia can help traders of all levels uncover these signals to determine the best timing to buy. Or use Profit Scanner’s technical insight to validate your own trading ideas. See how easy this powerful tool is to help you uncover hidden opportunities in the market.
