FINANCIAL SECTOR IS SHOWING MARKET LEADERSHIP, BUT STILL LOOKS RELATIVELY CHEAP -- BANK STOCKS HAVE BEEN FINANCIAL LAGGARDS -- INSURANCE STOCKS HAVE BEEN FINANCIAL LEADERS
FINANCIAL SECTOR STILL LOOKS CHEAP... Fianancial stocks have been showing market leadership during May. That's usually a good sign for the rest of the stock market. Financial stocks have at least two things going for them. One is that they're in chart uptrends. The other is that they're still cheap relative to the rest of the market. The price bars in Chart 1 show the Financials SPDR (XLF) having cleared its 2011 peak during the first quarter to record a major bullish breakout (see circle). Good as that is, it isn't nearly as good as the uptrend in the S&P 500. The SPX has been in a consistent uptrend since 2009 while the XLF traded sideways (until recently). That divergence was clearly visible when the SPX cleared its 2010 high during 2011, while the XLF failed to do so. It took another two years for the XLF to break through its 2011 peak. This year's upside breakout put the XLF back in sync with the broader market's uptrend. But it has a lot of catching up to do.
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Chart 1
FINANCIAL STOCKS ARE SHOWING NEW LEADERSHIP ... Chart 2 adds another feature to the financial uptrend by incorporating a relative strength ratio. The weekly price price bars show this year's bullish breakout in the Financials SPDR (XLF). The gray matter plots a relative strength ratio of the XLF divided by the SPX. After lagging badly behind the SPX during 2010 and 2011 (a falling ratio), financials have been rising faster than the SPX since the start of 2012 (a rising ratio). [The XLF has risen 17% during 2013 versus a gain of 14% for the S&P 500]. The fact that the bullish breakout in the financial sector is relatively recent makes it a cheaper choice than the rest of the market. The fact that financials are showing upside leadership adds to their appeal. But not all financial stocks are equal. Some groups in that sector are doing better than others.
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Chart 2
BANK STOCKS ARE FINANCIAL LAGGARDS... Bank stocks have been relative laggards in the financial sector. Chart 3 shows the KBW Bank Index SPDR (KBE) still testing its 2010 high, which means that it hasn't achieved a bullish breakout yet. The gray line is a ratio of the KBE divided by the Financial SPDR (XLF). The falling ratio over the last year shows the KBE lagging behind the financial sector. Chart 4 is a little stronger and shows the KBW Regional Banking SPDR (KRE) having cleared its 2010 peak. The falling KRE/SPX ratio (gray line), however, has also been dropping over the last year. That shows the regional banks haven't been financial leaders either. [The KRE and KBE have gained 14% and 15% respectively during 2013, versus an XLF gain of 17%].
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Chart 3
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Chart 4
INSURANCE STOCKS HAVE BEEN FINANCIAL LEADERS... Chart 5 plots the KBW Insurance SPDR (KIE) which demonsrtates a bullish combination of a rising price trend and relative strength. The weekly bars show the insurance ETF basket breaking through its early 2011 peak at the start of 2013 to achieve an impressive bullish breakout (see circle). That's only half of the story. The gray line on top of Chart 5 shows a rising KIE/XLF ratio all year. That rising ratio makes insurance stocks a leadership group within the financial sector and the broader market. [The KIE has gained 24% during 2013 versus an XLF gain of 17% and an SPX gain of 14%].
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Chart 5
INSURANCE LEADERS ... Scanning through the largest stocks in the insurance SPDR turned up three promising breakouts. The first one belongs to Old Republic Intl. (ORI) which is the biggest stock in the KIE. Chart 6 shows ORI breaking through its 2010 high to achieve a bullish breakout. The rising ORI/SPX ratio (gray line) also makes ORI a market leader. The same is true of Principal Financial Group (PFG) in Chart 7. The insurance leader has a bullish combination of a rising price trend and a rising relative strength line. Chart 8 shows Prudential Financial (PRU) having just exceeded its 2011/2012 high to turn its major trend upward. Its relative strength ratio (gray line) has started to rise as well. Two other insurance stocks (not shown here) that are close to achieving bullish breakouts are Hartford Financial Services (HIG) and Aflac (AFL). The technique I've used in this market message is one that I've used for years. Find a leading sector first (like financials). Then find a leading group within that sector (like insurance). And then find leading stocks in that group. Those leading stocks are usually the first ones to achieve bullish breakouts.
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Chart 6
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Chart 7
