R.M. Nunes The Financials closed last week at fresh relative highs to the growth-heavy S&P 500 dating back to early 2020. That nearly 3-year stretch of outperformance still catches many investors and portfolio managers off guard as names like JPMorgan (JPM), Bank of America (BAC), and Berkshire Hathaway (BRK.B) (BRK.A) are not the sexiest ones on the street. Still, nothing shows off better than alpha against a benchmark, and after the worst year of growth vs value since 2000, momentum is clearly on the side of value investors. XLF vs SPY: Near 3-Year Relative Highs Stockcharts.com All of this comes as traders continue to price-in interest rate cuts toward the end of 2023 and as the U.S. dollar slumps to multi-month lows against a basket of currencies. Generally, banks and smaller regional financial institutions tend to perform better when rates are on the rise, which sometimes correlates with an upward trend in the greenback. In this case, though, investors simply appear to be gradually shifting away from the growth style to big and small banks. With earnings season on tap, kicked off by JPMorgan Chase & Co, among others on Friday this week, the Financials sector will be in focus. Let’s uncover where the sector may go from here. According to SSGA Funds, the Financial Select Sector SPDR Fund (NYSEARCA:XLF) seeks to provide precise exposure to companies in the diversified financial services; insurance; banks; capital markets; mortgage real estate investment trusts (“REITs”); consumer finance; and thrifts and mortgage finance industries. XLF, created in 1998, is a liquid way to gain exposure to a cap-weighted basket of U.S. financial stocks. It has 67 total positions and the portfolio features expected 3-5 year EPS growth of 8.2%. The weighted-average price-to-book ratio is decently cheap at 1.65 while the forward price-to-earnings ratio is below that of the S&P 500 at just 14.4. The fund pays a quarterly dividend that sums to an annual yield of 2.0% over the past 12 months. With a 30-day median bid/ask spread of just three basis points and a yearly expense ratio of only 0.1%, it’s duly a solid way to play the S&P Financials sector. Overall, I like the relative valuation for Financials compared to the broad market, and it is one of BofA’s top sector picks based on their quantitative research. With a forward price-to-book ratio of just 0.43 versus a 0.59 long-term average, there appears to be decent value with the sector. Financials Relative Valuation: Attractive BofA Global Research BofA Global Research Seasonally, XLF tends to trade on a shaky foundation now through early March before the bulls take the group higher to finish off Q1 and start the second quarter. Thus, earnings season is usually a period of volatility rather than big opportunities for the bulls. This is a piece of evidence suggesting that some caution is warranted over the coming weeks. XLF Seasonality: A Rocky Jan-March Equity Clock The Technical Take XLF trades right below important resistance in the $35 to $38 range. Notice in the chart below that shares have climbed above the falling 50-week moving average while the 200-week moving average remains indicative of an uptrending XLF. What’s also interesting is that a downward trend in the weekly RSI has broken and there was bullish momentum divergence at the October low in the ETF while price barely undercut the June trough. Bigger picture, XLF managed to fall below the prepandemic high just above $31 but held a trading range where there was big volume by price. Going forward, I would like to see XLF notch a weekly close above $37 to help confirm the next leg of the rally. XLF: Shares Hold Long-Term Support, Eyeing Upside Resistance Stockcharts.com The Bottom Line XLF features a good valuation, and shares are near important resistance. We’ll know more after earnings season, and seasonality suggests some volatility ahead. We might have to wait until later this quarter before the next leg higher takes place.
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