Financial stocks have been on fire so far this year.
The XLF financial ETF rose by more than 17% during this period, roughly doubling its gains with the S&P 500. A shock wave from news on Archegos margin calls last week failed to discourage group rally.
Matt Maley, chief market strategist at Miller Tabak, said shares could yield to some short-term weaknesses after that rally.
“They became very, very over-bought a few weeks ago,” Maley told CNBC’s “Trading Nation.” “You look at his RSI chart, the relative strength index, on a weekly basis, is still quite overbought. In the last three rows when he got this overbought, it took a long time to really resolve this state and come back.”
The XLF ETF is trading at 72 on RSI, an overbought condition it has not seen since January 2018. Any reading of over 70 suggests that an asset is overbought.
However, Maley said the long-term setup looks incredibly strong for funding.
“The 50-week moving average is very close to the 200-week moving average. In other words, it’s approaching a gold cross on a weekly basis. Gold crosses tend to be daily on a daily chart, but when you receive it weekly, it’s “In fact, I haven’t seen one of those crosses in 2012,” said Maley.
“During that time, we also saw a big rally, and when the gold cross took place, it expanded to a much bigger rally over the next few years,” Maley added.
A golden cross is formed when a moving average of 50 periods moves above the 200 period. It is a formation that suggests an accelerated upward trend.
From June 2012 to a peak in August 2015, XLF almost doubled the price. Maley said he would look to buy the group weakly, while watching for a gold cross in the charts.
Steve Chiavarone, portfolio manager at Federated Hermes, is also betting on long-term financial strength. He said rising interest rates and a reopening of the economy should trigger even more gains.
“When you have something as depressed as some cyclicals, and the financial situation was, you can make a big percentage move and still not go back to where you were before that type of crisis event and I think this is the scenario for finance here “Chiavarone said during the same interview.
After peaking in February 2020, XLF fell 44% to a trough in March.
“You have a lot of stimuli coming through the system, more likely to come, and that puts upward pressure on rates. We see that this 10-year year reaches a level of 2% this year, which we believe offers an additional dip in the yield curve … I think the fundamental background for the financial statements continues to be really strong, we would use any weakness to to increase our overweight in that area, “Chiavarone said.
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