The financial sector is having a great start to the New Year, with the Financial Select Sector SPDR Fund
adding 6.9% so far this month. For the week to date, it leads all other sectors with a 4% rise, with the second-best, health care
up just 1.2% over the same time.
In addition, the financial sector is achieving this with the sort of healthy breadth it hasn’t seen in more than a year, according to a Thursday note by Bespoke Investment Group. It points out that “62% of stocks in the sector are currently trading above their 50-day moving average, which is better than any other sector in the index.”
Unfortunately, history shows such wide-ranging gains for financial-services stocks often don’t bode well for the sector over the next six months. Bespoke points out that it has been 273 trading days since the last time financials led the market in sector breadth, marking the fourth time financials have had to wait 200 trading days or more to lead by this metric since 2000.
“So, is this the beginning of a new period of outperformance for the sector? Don’t hold your breath,” the analysts wrote.
“In the three prior periods where financials ended a streak of more than 200 trading days without having the highest percentage of stocks above their 50-day moving average, the sector not only underperformed the S&P 500 index
over the following three and six months, but it also traded lower every time,” they said (see charts below).
Tom Martin, senior portfolio manager with Globalt Investments, who leads the firms analysis of the financial sector, agrees with Bespoke’s call. The financial sector performance year-to-date “is a short term bounce from last year’s poor performance,” he said.
“Financials are a value segment of the market that depend on the strength of the economy, and we have an economy that is decelerating, which isn’t good for the sector,” he added.
Another clue that the financial sectors outperformance won’t last is that there has been no clear change in market leadership so far from growth stocks to value stocks. “We haven’t seen the trough in earnings growth, and you need to be closer to that for investors to have a sustained, high level of interest in those names,” Martin said.
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