Examing financials and related subsector deterioration in relative strength.
Monday’s (10/20) feature highlighted last week’s change in high yield credit spreads and the near-term impact to the trending picture of regional banks. The recent headwinds and hurdles for broader financials have NOT been low ones to surpass and has compounded a steadily weakening technical picture for the sector. As highlighted in Monday’s feature, financials have fallen to fourth behind industrials and outside of the upper echelon of leadership (top three sectors) within the NDW DALI sector rankings for the first time since early 2024.
The sector’s signal tally deterioration since the beginning of the year has been methodical, with the decrease accelerating further in the latter half of the year and making financials account for the most loss in relative strength through Monday’s close (10/20). In fact, financials is the only broad sector to see deterioration in tally signal count during each quarter so far. Conversely, basic materials are the only sector to see an increase each quarter.
Given financials continued RS deterioration, examining under the hood of subsector relative strength reveals intriguing takeaways. Below are the market relative strength charts of the SPDR S&P Regional Banking ETF (KRE), SPDR S&P Banks ETF (KBE), and Financial Select Sector SPDR Fund (XLF) against the S&P 500 Equal Weight Index (SPXEWI) on their default scale of 3.25%. While an investor may have initially thought that recent negative RS shown by regional banks has solely driven negative RS for the broader sector in the NDW DALI sector rankings, the market RS chart reveals the regional banking space has shown long-term negative market RS since April of this year. Last week’s action brought both the market RS charts back into Os, exhibiting negative near-term RS after showing positive RS through the summer. With that reversal, the market RS chart of KBE is now one to closely monitor as it resides within a couple of boxes of a potential RS signal change. The broader sector representative’s RS chart still maintains a column of Xs on its market RS chart, but the sector is currently buoyed by the broker dealer and exchange space from a relative perspective within the DALI sector rankings as the iShares U.S. Broker Dealers & Securities Exchanges (IAI) continues to maintain positive near-term and long-term relative strength.
Recent financial holdings that have violated notable support on their trend charts or seen notable technical deterioration elsewhere would be ones to evaluate. Feel free to reach out to an analyst at (804)-320-8511 for questions.
