Overtime

Financials

Good morning,

The subject of this week’s (first official) Overtime is the financials sector. We last dove into the financials sector in the aftermath of the regional bank crisis, and hopefully provided some important perspective on what market indicators might signal contagion.

Luckily, none of those signals triggered and the broad sector has now fully retraced that decline. With the crisis potentially behind us, earnings in full swing, and rotation in the air, it seemed appropriate to take the sector into Overtime, review technicals for the broad sector, key stocks, and the potential for relative leadership in the back half of 2023.

---

Top-down technicals

XLF has now fully retraced the decline

In the regional bank crisis Deep Dive, I called out the October lows as a critical point to hold. The sector did that but hasn’t made much upward progress until the past two weeks, as it broke out above the 200-DMA to 3-month highs. Price action is bullish, with key moving averages now upward-sloping and the sector registering a solid overbought reading. Next resistance is the February highs near $37.

Breadth improving

Breadth is confirming the recent rally, with more than 2/3 of the sector above their respective 200-day exponential moving averages. That’s impressive considering the technical damage that occurred just 5 months ago.

Regional banks with the inverse H&S breakout

This is what a bottom looks like. The group at the epicenter of the crisis has decisively bottomed, with an inverse head and shoulders breakout. That’s great to see, but note that the measured target is just $52/share, roughly where the 200-DMA sits now. Above that, $56 may provide formidable resistance.

---

Key stocks