More Positive Signs for Financial Stocks

• Posted by Greg Harmon
• on May 11th, 2016

Financials had a long run higher until August 2015. What happened? The story goes that traders and investors started to believe that the Federal Reserve would actually raise rates. With that change in sentiment it was viewed that banks would suffer as loan rates they charge customers and interest rates they pay on deposits would rise. The stocks started a march lower.

In reality raising interest rates actually relieves some pressure on banks where they can create a spread when interest rates are higher. Additionally raising rates should be an endorsement of the strength of the economy. So over a longer view this should be good for financial institutions. But we all know life does not move in a straight line.

The Federal Reserve did raise rates, once, and the Financial Sector ETF (below) fell to 2 and a half year lows. But since that February bottom things have been looking up. Signs of recovery in the chart have been adding up and giving promise for the sector. The rising channel of higher highs and higher lows is the first positive.

Late in February the ETF moved over its 20 day SMA and then the 50 day SMA to start March. By mid April it had broken above its 200 day SMA, only to pullback. Tuesday saw that recover. The 50 day SMA is fast approaching the 200 day SMA as well for a bullish Golden Cross by the end of the month.

Momentum is holding up strong as well. The RSI is in the bullish zone, and making higher lows. The MACD is positive and has held there for 2 months, not the rollover that happened late last year. Another higher high will close the last gap from January and bring the November and December highs at 25 into focus. A move over 25 would mark a first major higher high and gather many more investors.

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