Like most investors we continue to look for leadership in the broad markets. To put the current environment in perspective the S&P 500 index continues to hit against resistance at the 1370 range. What, if anything, will take the index above this level and sustain the upside movement? I have heard plenty of suggestions and reviewed all ten major sectors of the index and find mixed signals which would explain the struggle at the current levels. However, one stands out to me as a catalyst for the broad index.
Financials are the catalyst point from my view. If they breakout, the S&P 500 index breaks out. At least that is how I see it now. The current talk about another stress test for bank balance sheets is all over the headlines with projections of results all over the media. The emotional tug-o-war relative to the sector remains the key ingredient. The Fed and others want to keep the banks in check and control the risk exposure, while the banks and Wall Street think the reforms are keeping the economy from expanding. There are valid points on both sides and the end result or outcome will continue to evolve. We however, have to watch for XLF, SPDR Financial ETF to break above the $15 level with conviction. KBE, SPDR Banks ETF and KRE, SPDR Regional Bank ETF need to move above the current consolidation patterns and move higher. They are all a key part of the market taking the next leg higher.
Breaking it down further the the large banks need to define clear leadership within the sector. Scanning KBE, SPDR Bank ETF there are several candidates to take on the leadership needed. Citigroup, Bank of New York, Wells Fargo, US Bankcorp and JP Morgan were the ones that jumped out. They have done well to get the sector to the current levels, but like the sector overall have stalled. The results of the stress test may provide the needed catalyst for these and other stocks to lead the upside looking forward.
The regional banks (KRE) are in a similar position of needing some leadership to take the sector to the next level. BB&T (BBT) has been a key leader in this sector and remains a strong candidate to continue the leadership. First Third Bank (FITB), PNC Financial (PNC) and Signature Bank (SBNY) are all consolidating as well near the recent highs. The leadership in the sector is key to breaking above resistance near the $27.40 mark on KRE.
The brokerage sector (IAI) is equally in play to assist the upside of the sector in breaking higher. JP Morgan (JPM) is the leading candidate in this sector, but the regional brokers are equally in play looking forward. Raymond James (RJF), Schwab (SCHW), AmeriTrade (AMTD), Ameriprise (AMP) and Jefferies (JEF) are all in an uptrend leading the sector. The regional brokers have more upside, from my view, as they have less weighing them down relative to profits and they have cleaner balance sheets.
The insurance sector (KIE) has quietly been leading higher, but they don’t get much respect or recognition from investors. The ETF is set to break above $41.25 resistance to continue the uptrend in play. The property and casualty companies are leading the sector with Cincinnati Financial (CINF), Allstate (ALL) and Progressive (PGR) leading the way. The sub-sector is important to the broad financial sector, but a less recognized part of the sector. However, it can play an important role on the upside.
The financials are in position to assist the broad index to break through resistance, but as we see above, each sub-sector needs to do its part to push the trend higher. They are all in position to make moves on the upside and the leadership is clearly defined, but it still comes down to conviction and belief they can sustain a move higher. The answer could be in the results of the stress test to give investors the needed confidence to add to their positions in the sector.