Tuesday, March 13, 2018

This Week's Message: Why We Like Financials Right Here -- And March Trends

This week we raised our financial sector target weighting to 18% (from 16%) of equities, making it our single heaviest position (previously tied with materials and industrials [still at 16% each]). Here's why:

Per the following bullet points, the setup for financials remains notably bullish going forward:

  • Market volatility will serve to substantially boost trading fees. Lack thereof was a drag on earnings in 2017.
  • Higher interest rates amid a good economic backdrop (steeper yield curve) will bolster net interest margins. I.e., banks borrow on the short-end and lend on the long-end of the curve.
  • While valuation by itself is never a good forward indicator, it's worth mentioning that the sector in the aggregate is trading at 14 times forward earnings vs 17.8 times for the S&P 500.
  • Our core financial sector ETF's (XLF) top 20 holdings have the least foreign revenue exposure among the top positions in our other major sector funds; a positive relative to protectionism risk and a stronger dollar.
  • Good or bad (good for the stocks), the powers that be are pushing hard at easing regs. However, mid-term election results pose some risk here.
  • The technicals, per the following charts, are bullish by definition.

Here's our 2-year daily chart of XLF. The top panel (on balance volume) indicates the level of conviction based on total daily volume for up days versus down days (a rising line denotes more passion from buyers versus sellers). The middle panel features XLF's share price and the 50 and 200-day moving averages. Price relative to both, plus the positioning and the slope of both confirm upward near and longer-term trends. Chaikin Money Flow (panel three) is designed to signal whether institutions are on net accumulating or distributing the security; the present reading suggests accumulation:

Click any chart to enlarge...

The following weekly chart utilizing the same indicators (but on a longer-term weekly basis), shows a presently strong uptrend looking to finally push above levels not seen since before the financial crisis:

Lastly, our monthly Moving Average Convergence Divergence (MACD) chart paints a very bullish picture:

The above synopsis justifies raising our financial sector target weighting, while reducing staples and energy by 1% each (to a target of 5% each).

As for staples and energy, there are clear fundamental reasons why we presently target mid-single digit exposure to both sectors, plus, per the daily charts below, the technicals also presently support our relative under-weighting. 



As for overall conditions:

In addition to the 81 inputs to our proprietary macro index, we maintain a monthly file where we capture other data that helps instruct our view of present global conditions. The following titles from our to-date March current trends file -- while pointing to some softening in the rate of growth in the Eurozone (supporting our stronger dollar thesis going forward) -- suggest that on balance the picture is one of sustainable global growth for the time being:

click to enlarge/focus...

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