Financial stocks braced for an extremely bullish move, chart suggests

Financial stocks have been on fire so far this year.

The XLF Financials ETF has risen more than 17% over this period, roughly double the gains of the S&P 500. A shock wave from news of Archegos’ margin call last week failed to succeed. dissuade the rally in the group.

Matt Maley, chief market strategist at Miller Tabak, said stocks could succumb to near-term weakness after this rally.

“They got very, very overbought a few weeks ago,” Maley told CNBC’s “Trading Nation” Tuesday. “You look at his RSI chart, his relative strength index, on a weekly basis, he’s still pretty overbought. The last three times he’s had this overbought it’s taken a long time to really work on this condition and bounce back. . “

The XLF ETF is trading at 72 on its RSI, an overbought condition it hasn’t seen since January 2018. Any reading above 70 suggests an asset is overbought.

Still, Maley said the long-term setup looks incredibly strong for finances.

“The 50 week moving average is very close to the 200 week moving average. In other words, it is 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 true. In fact, we haven’t seen any of these crossovers since 2012, “Maley said.

“That time around we had also seen a great rally, and when the Golden Cross was held it extended to a rally much further over the next few years,” added Maley.

A golden cross is formed when a 50 period moving average moves above the 200 period. This is a bullish formation which suggests an accelerating upward trend.

From June 2012 to a peak in August 2015, the price of XLF almost doubled. Maley said he would look to buy the group off on weakness, while keeping an eye out if a golden cross is seen in the charts.

Steve Chiavarone, portfolio manager at Federated Hermes, is also betting on the long-term strength of financials. He said rising interest rates and reopening the economy should lead to even more gains.

“When you have something as depressed as some cyclicals, and the financials was, you can get a big percentage and not go back to where you were before this kind of crisis event and I think that ‘is the scenario for financiers here, ”Chiavarone said in the same interview.

After peaking in February 2020, the XLF fell 44% to a low in March.

“You have a lot of stimulus through the system, more likely to happen, and that puts upward pressure on rates. We see the 10-year hitting a 2% level this year, which we believe gives a really nice extra slope. of the yield curve… I think the fundamentally financial backdrop continues to be really strong, we would use any weakness to increase our overweightings in this area, ”Chiavarone said.