A Case for Buying Financials Ahead of the Fed

• Posted by Greg Harmon
• on June 10th, 2015

The financial stocks have played an interesting role in the market resurrection from the 2009 lows. There have been 3 distinct movements. First a quick brief rise out of the depths. This only took 4 months. If you were looking for a Dead Cat Bounce this was a distinct possibility. Then the second piece was a long consolidation over 3 years. This piece is interesting because the broad market rallied, and gave rise to the meme that financials were not participating. And how long could the market rise without them.

With all good memes, the ones that are actually true (the few of them) get held too long and repeated well beyond their lifespan. This was the case with the ‘financials are not participating’ meme. Financials started moving higher in mid 2012 and continued to do so for 2 and a half years until making a top at the end of 2014.

Since the start of 2015, the price action (not the meme) has shown consolidation. In fact if you look back to the October low in 2014, it sets up an ascending triangle pattern. This is usually a continuation pattern, so there is no reason to think at this point the move higher has ended. But think about the timing of the long run higher and then the pause.

The run higher came out of the depths of the sell off in bank stocks and after the stress tests. They showed, like everyone knew would be the case, that the banks would not fail in another crisis. It was time to catch up once they were pronounced healthy. You can’t blame investors for waiting for the proclamation. But the stop of the run is very odd timing. Right when the Federal Reserve Open Market Committee proclaims that it is time to consider raising rates.

Aren’t higher rates supposed to be good for banks? Yet for 7 months the Financial Sector ETF has consolidated. It is like it is waiting for that first rate hike before continuing higher. I see two paths to take from this point. Realize that rates are rising and just buy the financials now. Or wait for that ascending triangle to trigger and then buy the financials. Either way……

I hold long positions for clients and family in AIG, BAC, C, FIG, IAT, JPM, NWBI, OZRK, and WFC at the time of this writing.

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