Financials have dropped in our sector rankings as payment processors point to potential issues in the economy.
Financials were one of the strongest sectors through the first three quarters of the year. The sector ranked in the top three within DALI’s sector rankings and had an average score reading above 4.0 on the Asset Class Group Scores page at the end of September. However, financials have regressed over the past few months and are now firmly in the equal weight or neutral basket with respect to other sectors. The broad technical picture is average at this point when looking at the Financial Select Sector SPDR ETF (XLF) which has an acceptable 4.84 fund score but has been range-bound for the last five months. A couple of important support levels to watch moving forward are $51.50 and $50. Below $50 there isn’t any support until the bullish support line with further support at $45.50 and $45.
One of the areas within financials that has deteriorated recently are payment processors. A proxy for the space is the Amplify Digital Payments ETF (IPAY) which has a poor 2.18 fund score and a negative score direction of 2.54 which speaks to the decline in strength. IPAY was unable to get back to its January highs from earlier this year before falling in September and October. IPAY is down just over 11% year-to-date, lagging both the S&P 500 and the broad financials sector. Some of the blue-chip names like American Express (AXP) and Mastercard (MA) maintain a five out of five technical attribute rating with AXP being far and away the leader in the subsector. A lot of the issues were with lesser used payment processors that had a crypto focus or buy-now-pay-later model which are expected to be volatile and had been weak for some time. However, Visa (V) may be signaling that issues experienced by riskier companies are creeping up to more established names. V recently broke down into a negative trend and reversed down on its market relative strength chart for the first time since 2022 after giving four consecutive sell signals. While MA is still a perfect 5 for 5’er, it has a year-to-date return of 2.08% which is worse than V. MA also trades on two consecutive sell signals and is shaping up for a test of its positive trendline. Overall, for a few months it seemed like the weakness in the payment processor space was limited to the smaller companies with riskier business models but that has started to expand out to blue chip names like Visa and Mastercard and potentially signaling weakness for the broader economy.
