Financial sector (XLF Stock): A promising seasonality
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Subscribe to PremiumThe US financial services sector is having a strong bearish June: the main ETF #XLF, or the Financial Select Sector SPDR Fund, in fact, decreased by almost 7% from the highs of the beginning of the month.
Even worse have done some stocks with major retracements from May highs: Allstate Corporation (#ALL) -10%, JP Morgan Chase (#JPM) -10%, Citigroup (#C) -15%, Regions Financials Corporation ( #RF) -17% and Huntingon Bancshares (#HBAN) -20% just to name a few.
Bullish opinion: this retracement is positive as it allows individual stocks to exit the overbought territory and offer investors attractive entry points at least for the short to medium term.
Bearish opinion: a strong retracement that substantially nullifies the gains of the previous month is a strong alarm bell. This could in fact lead to a reversal of the trend and further fluctuations in the short to medium term.
Both points of view are correct and as often happens the truth is positioned right in the middle: it is difficult to think that the entire financial services sector will collapse by 40% -60% as it did in March 2020 and it is equally, perhaps, too optimistic to think of explosive growth of 20-30% in the following months.
In fact, we believe that the following months and especially the month of July will offer interesting opportunities in the financial sector aiming for returns between + 10% and + 15%.
Our thesis is supported by two main studies: the seasonality of the sector and the relative strength in relation to the reference index.
Seasonality: Financial sector #XLF
Analyzing the data of the last 20 years it can be seen that the month of June has always been characterized by a strong bearish current: in fact, only 35% of the time it was possible to record a positive performance compared to the month of May.
Completely different situation in July: in the last 20 years, 75% of the time, the financial sector represented by the XLF ETF has recorded a positive performance.
Relative rotation graph: #XLF
The Relative Rotation Graph (RRG) shows the last 30 trading days of XLF, where it moved from leading sector to the lagging sector. That is, from a sector with momentum and performance above the S&P500 (the benchmark index) to a sector with momentum and performance below the S&P.
While picturing two different time frames: that of seasonality, the last 20 years, and the RRG the last 30 days, we can see a strong correlation.
Both show a very positive end of April which then gradually lost vigor and momentum to reach the "lows" in June.
We conclude our article with the conviction that the Financial Sector, in the month of July, will be able to offer interesting opportunities: combining the relative strength of the last 30 days, together with seasonality of the last 20 years, we will identify those stocks that better position for bullish upsides in the short term.
To date, we are tracking 10 stocks that could turn out to be good opportunities in the month ahead:
ALL-STATE CORPORATION (#ALL).
ARTHUR J. GALLAGHER & CO (#AJG).
FRANKLIN RESOURCES (#BEN).
CITIGROUP (#C).
HUNTINGTON BANCSHARES INCORPORATED (#HBAN).
PROGRESSIVE CORPORATION (#PGR).
EVEREST RE GROUP (#RE).
REGIONS FINANCIAL CORPORATION (#RF).
WILLIS TOWERS WATSON (#WLTW).
W.R. BERKLEY CORPORATION (# WRB).
The US financial services sector is having a strong bearish June: the main ETF #XLF, or the Financial Select Sector SPDR Fund, in fact, decreased by almost 7% from the highs of the beginning of the month.
Even worse have done some stocks with major retracements from May highs: Allstate Corporation (#ALL) -10%, JP Morgan Chase (#JPM) -10%, Citigroup (#C) -15%, Regions Financials Corporation ( #RF) -17% and Huntingon Bancshares (#HBAN) -20% just to name a few.
Bullish opinion: this retracement is positive as it allows individual stocks to exit the overbought territory and offer investors attractive entry points at least for the short to medium term.
Bearish opinion: a strong retracement that substantially nullifies the gains of the previous month is a strong alarm bell. This could in fact lead to a reversal of the trend and further fluctuations in the short to medium term.
Both points of view are correct and as often happens the truth is positioned right in the middle: it is difficult to think that the entire financial services sector will collapse by 40% -60% as it did in March 2020 and it is equally, perhaps, too optimistic to think of explosive growth of 20-30% in the following months.
In fact, we believe that the following months and especially the month of July will offer interesting opportunities in the financial sector aiming for returns between + 10% and + 15%.
Our thesis is supported by two main studies: the seasonality of the sector and the relative strength in relation to the reference index.
Seasonality: Financial sector #XLF
Analyzing the data of the last 20 years it can be seen that the month of June has always been characterized by a strong bearish current: in fact, only 35% of the time it was possible to record a positive performance compared to the month of May.
Completely different situation in July: in the last 20 years, 75% of the time, the financial sector represented by the XLF ETF has recorded a positive performance.
Relative rotation graph: #XLF
The Relative Rotation Graph (RRG) shows the last 30 trading days of XLF, where it moved from leading sector to the lagging sector. That is, from a sector with momentum and performance above the S&P500 (the benchmark index) to a sector with momentum and performance below the S&P.
While picturing two different time frames: that of seasonality, the last 20 years, and the RRG the last 30 days, we can see a strong correlation.
Both show a very positive end of April which then gradually lost vigor and momentum to reach the "lows" in June.
We conclude our article with the conviction that the Financial Sector, in the month of July, will be able to offer interesting opportunities: combining the relative strength of the last 30 days, together with seasonality of the last 20 years, we will identify those stocks that better position for bullish upsides in the short term.
To date, we are tracking 10 stocks that could turn out to be good opportunities in the month ahead:
ALL-STATE CORPORATION (#ALL).
ARTHUR J. GALLAGHER & CO (#AJG).
FRANKLIN RESOURCES (#BEN).
CITIGROUP (#C).
HUNTINGTON BANCSHARES INCORPORATED (#HBAN).
PROGRESSIVE CORPORATION (#PGR).
EVEREST RE GROUP (#RE).
REGIONS FINANCIAL CORPORATION (#RF).
WILLIS TOWERS WATSON (#WLTW).
W.R. BERKLEY CORPORATION (# WRB).
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