The big intra-day bounce in the marketplace today came from many of the battered financial stocks. Although the S&P 500 Financials is now the fifth-largest market-cap-weighted sector comprising 10.30% of the overall SPX index it continues to be an important S&P 500 sector.
Why? The Financial sector is more than Wall Street and the Stock Exchanges. It is made up of brokers, financial institutions, money markets, insurance, and credit lenders – all of which provide the services that are necessary to help Main Street functioning properly. For the economy to grow you need a healthy and fully functioning financial sector that lends to businesses and provide mortgages and financings to Main Street.
The coronavirus-induced economic downturn has hit the S&P 500 Financial sector especially hard. And the pertinent question is whether the worst is over or if there is more pain to come?
From a technical perspective, we remain cautious about the S&P 500 Financial sector (XLF) as evidenced by the placement of this S&P 500 sector within the Lagging Quadrant of the RRG chart. However, we are encouraged by a positive outside day on 5/14/20. This offers initial technical signs of the potential for a near-term bottom. A higher-low pattern as represented by the 5/14/20 low (20.09) higher than the 3/23/20 low (17.49) is also technically constructive. The above technical developments hint of an oversold rally, at least from a near-to-medium term perspective.
Nonetheless, there is formidable resistance on rallies including key initial resistance at 22.70-23.66 coinciding with the 38.2% retracement from the Feb-Mar 2020 decline and the recent 4/29/20 high. Trading above this resistance can help to extend the XLF recovery to 24.30 or the 50% retracement, and above this to key intermediate-term resistance at 26-27 corresponding to both the pivotal 61.8% retracement and the crucial 200-day ma. Only with a convincing breakout above 25-27 will this confirm the start of a sustainable intermediate-term XLF recovery.
Attached below are analyses on the S&P 500 Financial sector (XLF), its key sub-industries, and an RRG and SCTR ranking of the stronger S&P 500 Financial names. Remember, XLF remains confined to the Lagging Quadrant, and as such this suggests investors and traders need to remain stock selective focusing only on the relative strength leaders.