Financial stocks have been on fire so far this year.
XLF’s financial ETF has risen more than 17% over that stretch, about twice as much as the S&P 500. A shock wave from Archegos’ margin call news last week failed to deter the group’s rally.
Matt Maley, chief marketing strategist at Miller Tabak, said stocks could succumb to a short-term weakness after that rally.
“They have become very, very overbought a couple of weeks ago,”
The XLF ETF is trading at 72 on its RSI, an overbought condition it has not seen since January 2018. Any reading above 70 suggests that an asset is overbought.
Nevertheless, Maley said that the long-term setup looks incredibly strong for the economy.
“The 50-week moving average is approaching the 200-week moving average. In other words, it comes very close to a golden cross on a weekly basis. Golden crosses tend to be bullish on a daily basis in the charts, but when “You get it weekly, it’s even more. In fact, we have not seen one of these intersections since 2012,” said Maley.
“At that time we had also seen a big rally, and when the golden cross took place, it expanded to a much longer rally in the next few years,” Maley added.
A golden cross is formed when a 50-period moving average moves over the 200-period. It is a bullish formation that suggests an accelerating trend to the upside.
From June 2012 to a peak in August 2015, the XLF almost doubled in price. Maley said he would buy the group on weakness, while keeping an eye on whether a golden cross is seen in the charts.
Steve Chiavarone, portfolio manager at Federated Hermes, is also focusing on long-term strength for finance. He said rising interest rates and a reopening economy should trigger even more gains.
“When you have something as depressed as some of the cyclical ones, and the economy was, you can get a large percentage and still not be back where you were before that kind of crisis event, and I think that’s the scenario for economics here,” he said. Chiavarone during the same interview.
After reaching a peak in February 2020, the XLF fell 44% to a trough in March.
“You have a lot of stimulus coming through the system, more likely to come, and that puts upward pressure. We see that the 10s reach a 2% level this year, which we think gives a very nice further steeping. Of the yield curve. “I think the economic background continues to be very strong. We will use any weakness to increase our overweight in this area,” said Chiavarone.