Financial stocks and sector-related exchange traded funds are beginning to outpace the broader equities market and is now testing a resistance level.
The Financial Select Sector SPDR (NYSEArca: XLF) has pulled ahead of the broader market, rising 3.5% over the past month and 3.4% over the past three months. In contrast, the SPDR S&P 500 ETF (NYSEArca: SPY) gained 2.4% over the past month and 1.9% over the last three months. [Small Bank ETFs Begin Outpacing Wall Street Bankers]
The outperformance may continue if the financial sector is able to break above a key level. Specifically, Ari Wald, head of technical analysis at Oppenheimer, argues that XLF could experience further strength if it breaks above its previous high, reports Alex Rosenberg for CNBC.
XLF was up 1.1% Wednesday, trading around $24.98 per share, testing its previous peak of $25.14 back in late December.
The XLF “peaked in December at $25. We are now moving back to that level,” Wald said on CNBC. “Aside from what could be a pause here, we think we break through.”
Wald pointed to a strong momentum heading into the resistance level. The financial sector has been steadily creating higher lows and remains above its 50- and 200-day moving averages.
“A strong trend heading into this level,” Wald added. “We’re making higher lows. We have a rising 200-day moving average. So we would be playing for a breakout.”
In a strong uptrend, traders could fuel the rally once a security conclusively breaks through a resistance.
Erin Gibbs of S&P Capital IQ also pointed to fundamental strength in the sector. Gibbs calculates that the financial sector has an expected earnings growth rate of 10.8%, the third highest out of the 10 S&P sectors, and is more attractively valued than the other big expected growers, like consumer discretionary and healthcare names.
Financial Select Sector SPDR
For more information on the financials sector, visit our financial category.
Full disclosure: Tom Lydon’s clients own shares of SPY.