January 4th, 2012

Preliminary Positive Signs on Banks and Financials

A market timing strategy sometimes recommended by professionals like Fidelity Investments assumes that the various phases of the stock market’s life cycle correspond roughly to the stages of an economic business cycle.  To aide investors following the strategy, they developed the following schematic which overlays a typical economic cycle, the market life cycle phases corresponding to the various economic sectors and the industry groups that typically tend to perform best in them.

In the Financial Crises Crash, financial stocks was one of the first (after homebuilders) and most beaten down of all the Industry Groups having come under new, intense Federal scrutiny, regulation and restructuring and, up to now, the stocks have been slow to recover.  But their time may be coming.  The XLF (Financials ETF) appears to be struggling to form a small reversal bottom with a neckline at 14.00 which if crossed could carry the stock to the next resistance at 17.00:

The XLF is comprised mostly of the larger-cap, money center banks and insurance companies (click here for the current list of top holdings).  The ETF of smaller regional bank stocks, RKH, looks similar and the the various IBD regional bank groups are continually advancing in their ranking among the 197 Industry Groups.  Two examples of groups moving higher and above their 20-week moving average are the Midwest and Southwest banks:

If these aren’t apparitions but inklings that the financials are actually beginning a recovery reversal then the market may also finally begin to break out of it’s long trading range, emerge from its funk and begin an assault somewhere down the road on it’s all-time time high.

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