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Last week, I wrote about the energy sector and how we were getting mixed signals from the daily charts versus what we are seeing from the weekly charts.
The same thing is happening in the financial sector. The mixed signals are coming right as a number of big banks are preparing to release earnings results for the first quarter.
When I ran my scans last night, 15 out of 22 bullish signals came from the financial sector with 13 individual stocks and two ETFs. Unfortunately we see that the weekly chart doesn’t support what we are seeing from the daily charts. As I did with the energy sector, rather than trying to show you 15 different charts, I will use the Financial Select Sector SPDR ETF (NYSEArca: XLF) as a proxy for the financial sector.
What we see on the daily chart of the XLF is a similar pattern to what we saw last fall when the fund saw its 10-day moving average move above its 50-day moving average. Then in December the 10-day moved back below the 50-day. The 10-day moved above the 50-day in early March, but the fund has struggled in recent days and has fallen below its 10-day. That has caused the 10-day to approach the 50-day with the possibility of making another bearish crossover.
It is also worth noting that the XLF hit a temporary high in early November and then fell before bouncing back. However, the December high didn’t quite get as high as the November one. Now we see that the fund hit $22.84 on March 21, fell and then bounced back, but once again the bounce peaked out at $22.73 on April 4.
When we look at the weekly chart we see that the fund has bounced back nicely from its January low, but it remains below its 52-week and 104-week moving averages. Most of the other select sector SPDR ETFs have been able to move back above the long-term moving averages as have the major indices. This shows that the financial sector has been lagging over the last few months.
We also see on the weekly chart that the stochastic readings are approaching overbought territory.
With everything we see from the charts, what happens from here for the XLF will likely depend on what we see in the earnings reports. JPMorgan Chase (NYSE: C) will report Wednesday, Bank of America (NYSE: BAC) and Wells Fargo (NYSE: WFC) both report on Thursday and Citigroup (NYSE: C) announces results on Friday. All four of these companies are among the top five holdings in the XLF.
What really scares me about these four companies and their pending earnings reports is the sentiment toward the stocks. The average short interest ratio on the four is 1.33 with JPM having the highest one at 1.67 and BAC having the lowest one at 0.74. Analysts are bullish on the stocks as well with a total of 98 “buy” ratings on the group, 23 “hold” ratings and only five “sell” ratings. Between the analysts’ ratings and the short interest ratios, the sentiment toward these four stocks is extremely bullish and that is a concern, especially ahead of earnings reports as the expectations are high.
I would look to short the XLF in the $22 to $23 range with a downside target of at least $19.50. If the fund breaks below that January low, we could see it fall much lower. The next layer of strong support would be down below the $16 level.
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