There’s a bullish golden cross forming for one sector. And the last time this pattern was seen, the sector nearly doubled.
Financial stocks have had a great start to 2021.
The XLF S&P 500 Financial Sector ETF is up just over 18% so far this year, outperforming the S&P 500’s gain of nearly 11%, with not even last week’s Archegos blow-up enough to halt the rally.
The XLF’s top holdings are also up substantially. JPMorgan (NYSE: JPM) is up 22% year-to-date, Bank of America (NYSE: BAC) has gained 32%, Wells Fargo (NYSE: WFC) is up 32.5%, Citigroup (NYSE: C) has added 18%, and Goldman Sachs (NYSE: GS) has risen nearly 24% since the start of 2021.
But one trader says the group could see some weakness in the near-term.
“They’ve become very, very overbought,” said Miller Tabak chief market strategist Matt Maley. “You look at its RSI chart, relative strength index, on a weekly basis, it’s still quite overbought. The last three times it got this overbought, it took a long time for it to really work off that condition and bounce back.”
Even still, Maley argues over the long-term, financials look promising.
“The 50-week moving average is getting very close to the 200-week moving average,” Maley said. “In other words, it’s getting very close to a golden cross on a weekly basis. Golden crosses tend to be bullish on a daily basis on the charts, but when you get it on a weekly basis, it’s even more so. In fact, we haven’t seen one of those crosses since 2012.”
A golden cross is when a stock’s short-term moving average crosses above its long-term moving average, and indicates the potential for a major rally.
Back in 2012, “we’d also seen a big rally, and when the golden cross took place, it extended to a much further rally over the next several years,” Maley added. After the golden cross in July 2012, the sector rallied until August 2015 and nearly doubled in that time.
Beyond the technical picture, Federated Hermes portfolio manager Steve Chiavarone says the sector should see long term gains as interest rates rise and the economy continues to reopen.
“When you’ve got something that’s as depressed as some of the cyclicals, and the financials were, you can get a big percentage move and still not be back where you were prior to that kind of crisis event and I think that’s the scenario for financials here,” Chiavarone said.
“You’ve got a lot of stimulus coming through the system, more likely to come, and that puts an upward pressure on rates,” Chiavarone added. “We see the 10-year reaching a 2% level this year which we think gives a really nice further steeping of the yield curve… I think the backdrop fundamentally for financials continues to be really strong, we would use any weakness to increase our overweights in that area.”
The financials group kicks off first-quarter earnings season next week. As for which stock in the sector might be a buy ahead of reporting, Citigroup analysts say Goldman Sachs looks poised to benefit from the strong macro environment.
The analysts boosted their price target on Goldman Sachs shares to $390 – 18% higher than the price as of this writing.
“We think management can achieve mid-double digit returns helped by a higher rate environment, which we are now baking into our models although they are the least impacted of the banks in our universe,” Citigroup analyst Keith Horowitz wrote in a note to clients.