JPM not enough for financial sector to move higher

The earnings in the financial sector kicked off Tuesday with JP Morgan and Wells Fargo reporting. Both beat estimates, but only JPM made a move higher on the day gaining 1.7%. This was on our special update last night on pattern setups and breakouts.  The resistance at the December highs are the next to be dealt with if the stock is to hit a new high. It now sets up with a messy looking reverse head and shoulder pattern and a breakout establishing a target at the $74 level. Worth watching as it plays out near term. Wells Fargo beat earnings as well, but with increased expenses in the quarter saw profits dip below the Q1 year-over-year profits. That was a disappointment and sparked some mild selling in the stock. The bank ETF KBE was down 0.5% on the day as the concern from investors remains facing Bank of America in the morning. The broader sector XLF was flat on the day. This remains a sector facing extreme scrutiny from investors. There will be plenty of news in the sector in the coming week and it will also give insight into how investor sentiment is towards the sector overall.

The regional banks (KRE) offer more interest short term from my view as the earnings season will be more telling in terms of upside growth potential. Bank of the Ozarks (OZRK) broke from the  consolidation wedge starting on Friday and has now followed through to a new high this week. These are the kind of opportunities I expect from the regional banks more than the larger money center banks. Scanning the sector shows both setups as well as those that have already reestablished their previous uptrends. The chart below shows the trading range the sector has been stuck in for last fourteen months. Time for some upside momentum.

Chart

The insurance sector (KIE) hit a new closing high today as seen on the chart below with a continuation of the uptrend of October low. There has been plenty of sideways trading the last two month, but the sector looks ready to continue to the upside at this point. VR, PRE, RE and AHL all reinsurance companies, broke from consolidation patterns to new highs today. The sub-sector is gaining nicely as money rotates on positive earnings and M&E activity. Breaking the financial sector down allows us to find the opportunities within the sector despite the overall neutral outcome.

The early selling on data found some buyers heading into lunch with the indexes settling back near even on the day. The bias remains with the buyers from my perspective. The sellers have not exercised much in terms of aggression on broader markets. If anything the bigger traders are waiting for their time and picking their spots to determine what opportunities they will have on the upside should the news generate the events or catalyst that some a waiting to see.

How do we manage this going forward? Cautiously and judiciously. The data, technical indications, and lack of sellers is leaning towards buyers and accumulating positions for the next move higher. If the sellers show up we always have our stops to keep us from suffering on the downside, but if the buyers take the indexes higher we are in position to participate in the move without attempting to chase entries.

It is important to understand that a correction in the markets is not historically started by a weakness in earnings… it a catalyst of fundamental proportion that brings into question the health/growth of the markets going forward. For now neither side has shown much in terms of conviction, but the buyers have been more willing to put money work than the sellers are willing to speculate and drive prices lower. For now we take it one day at a time. We have added positions and we continue to put money to work where it shows promise. Steady wins the race and for now we continue to trade sideways with an eye on the upside move.