Financial stocks have been on fire so far this year.
The XLF financial ETF has risen more than 17% in this stretch, about twice the rise of the S&P 500. A shock wave of news of the Archegos margin call last week did not deter the rally of the group.
Matt Maley, Miller Tabak’s chief market strategist, said the shares could succumb to some weakness in the short term after that merger.
“A couple of weeks ago they have become very overbought,” Maley told CNBC’s “Trading Nation” on Tuesday. “Look at your weekly RSI chart, the relative strength index is still pretty much overbought. The last three times you got that overbought, it took a long time to really work in that condition and recover.”
The XLF ETF is trading at 72 in its RSI, an overbought condition that it has not seen since January 2018. Any reading above 70 suggests that an asset is overbought.
Still, Maley said the long-term setup looks incredibly strong for finances.
“The 50-week moving average is very close to the 200-week moving average. In other words, it’s very close to the weekly golden cross. Golden crosses are usually bullish daily on the charts, but when you get it weekly, the it’s even more. In fact, we haven’t seen any of these crosses since 2012, “Maley said.
“That time, we had also seen a big rally, and when the gold cross took place, it extended to a much longer rally over the next few years,” Maley added.
A golden cross is formed when a 50-period moving average moves above the 200-day period. It is a bullish formation that suggests an accelerated upward trend.
From June 2012 to the peak in August 2015, XLF nearly doubled in price. Maley said he would try to buy the group out of weakness, watching to see if a golden cross is seen on the lists.
Steve Chiavarone, portfolio manager at Federated Hermes, is also committed to long-term financial strength. He said rising interest rates and the reopening of the economy should lead to even more gains.
“When you have something as depressed as some of the cyclical ones, and the financial resources were, you can get a big percentage of moves and still not get back to where you were before this kind of crisis event and I think that this is the scenario for here, ”Chiavarone said during the same interview.
After reaching its peak in February 2020, the XLF fell 44% to a low in March.
“You have a lot of stimuli through the system, they’re more likely to come in, and that puts upward pressure on rates. We see the ten years reach a level of 2% this year, which we think gives a really nice slope of the yield curve … I think the background fundamentally for finance is still really strong, we would use any weakness to increase our excessive weights in this area, ”Chiavarone said.
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