Financial stocks have been on fire so far this year.
The XLF financial ETF has risen more than 17% during that stretch, roughly double the gains of the S&P 500. A shock wave from the news of the Archegos margin call last week failed to deter the rally in the group.
Matt Maley, Miller Tabak’s chief market strategist, said stocks may succumb to short-term weakness after that rally.
“They’ve gotten very, very overbought a couple of weeks ago,” Maley told CNBC’s “Trading Nation” on Tuesday. “You look at his RSI chart, Relative Strength Index, on a weekly basis, he’s still quite overbought. The last three times he had this overbought, it took him a long time to overcome that condition and recover.”
The XLF ETF is trading at 72 on its RSI, an overbought condition that it hasn’t 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 getting very close to the 200-week moving average. In other words, it is getting very close to a weekly gold crossover. Gold crosses tend to be bullish on a daily basis on charts, but when they do you get weekly, it’s even more so. In fact, we haven’t seen one of those crossovers since 2012, “Maley said.
“That time, we had also seen a big rally, and when the golden cross took place, it spread to a much more rally over the next several years,” Maley added.
A golden cross forms when a 50-period moving average moves above the 200 period. It is a bullish formation that suggests an accelerating upward trend.
From June 2012 to a peak in August 2015, the XLF nearly doubled in price. Maley said he would be looking to buy out of the group out of weakness, while keeping an eye out for a golden cross on the charts.
Steve Chiavarone, a portfolio manager at Federated Hermes, is also banking on long-term financial strength. He said that rising interest rates and reopening the economy should bring even more profit.
“When you have something that is as depressed as some of the cyclical cycles, and finances were, you can get a large percentage of movement and still not be back where you were before that kind of crisis event and I think that’s it. the stage for finance here, “Chiavarone said during the same interview.
After reaching a peak in February 2020, the XLF fell 44% to a low in March.
“There are a lot of stimuli coming through the system, they are more likely to come, and that puts upward pressure on rates. We see the 10-year level reaching 2% this year, which we think is a good rise. of the yield curve … I think the backdrop fundamentally to finance is still really strong, we would use any weakness to increase our overweights in that area, “Chiavarone said.