Post the election the Financial Stocks sector led the way and was the driving force for the rally into year end. This led to the various subsectors of Financial Stocks occupying the top 8 sectors out of the 197. Key breakouts and signals came first from Wells Fargo (WFC) and then Goldman’s (GD) immediately after the election.
The two charts show how the signals appeared and then a series of exits triggered as the red exit numbers appeared.
Wells Fargo posted a Blue Triangle Buy in October and the 4 exits came through throughout the rally, annotated by the sequential numbers. Each time a number appears a partial exit is triggered. Your protection line or stop loss was the Pink line, which told how much volume could be traded.
That was aggressive, so for those waiting for the election an easier trade occurred when Goldman Sachs (GS), signalled a breakout buy as there were no resistance line points above. Price gave two partial take profit numbers. Trading Safely is not a Black Box and this is highlighting by the two buy further buy signals that appeared. This was not for actionable for two reasons. Firstly, the buys were moving directly into the Resistance line that had appeared at the top of the top of the trend, and secondly we were within our 7 day rule. This is when a stock will be announcing its results within a week of the signal appearing.
Financial Stocks are one of the first sectors to post results within Earnings Season and on our Hangout on January 16th commented that with Financial Stocks being within the top 8 sectors of the 197 that we monitor, it didn’t matter what results came in as it would be hard for a rally to develop once more. This is because it is a crowded trade and everyone is already long. Right on cue Goldman’s beat estimates handsomely, but the price actually fell. This is what we call Good News Bad Action.
Fast forward to yesterday and some major developments have occurred once Janet Yellon has been digested. Bank of America (BAC) produced a Buy signal last week, but in a similar vein to Goldman’s it was directly into a final major resistance point and therefore was not actionable. However, yesterday saw a conclusive breakout above that point indicating that the uptrend is restarting. Exactly the same has happened on Goldman’s as the previous picture shows.
In contrast Wells Fargo has simply stopped at the final resistance created last month and is so far not breaking out.
However, one of the major Financial ETF’s (IYF) is also signalling a breakout. The caveat is that new investors are a little late to the party as it remains a crowded trade, but whilst it avoids moving below the January congestion period another up leg can develop, albeit far less explosive than the initial trend. IYF has a Trading Safely Pink Protection Line within that pattern and price would need to close below that point to signal that it was a loss making trade.
Many Hedge Funds and Private Managed Equity entities are forced to hold a more balanced portfolio which means they must buy something and sell something, normally within the same sector. The idea is that it mitigates risk and limits exposure to unexpected global macro events. Our philosophy is that for such strategies is to buy the strongest and sell the weakest.
Northern Trust Group (NTRS) is the second weakest in its group and it recently missed on its results and gapped lowered, having posted a Sell Signal previously. It is now getting dragged upwards by its peers but continues to underperform. In contrast SVB Financial is the strongest, and the Buy signal back in October has remained intact. It has never breached its support lines and never formed resistance either, and once more broke up yesterday.
Please note this is general advice from Trading Safely for all our clients and has been prepared without taking into account your personal objectives, financial situation or needs. If you do wish to consider acting on our information please contact a licensed financial advisor to discuss the appropriateness of this recommendation for your own personal financial circumstances. Please obtain any relevant product disclosure documents before deciding to invest. Trading derivatives, stocks and CFDs can lead to losses greater than your deposit.