Financial Stocks Record Longest Losing Streak in The First Half of 2018

Business March 4, 2019

XLF Records Longest Losing Streak

Early in the year, financial stocks were allegedly considered to be the favorites of most investors. Analysts believed that the deregulation measures by the Trump administration coupled with the increasing efforts of the Federal Reserve would have created a favorable atmosphere for financial stocks to thrive and rank high on indexes.

However, reports have revealed that financial stocks have grossly performed below the market expectations for the first half of 2018. Thus, even though the financial tracking-XLF showed reasonable positive signs in recent sessions, the posting, however, came after its 13 days longest losing streak.

Analysts have surmised that things could still get worse for the financial stocks. While addressing a media outlet, Craig Johnson, the chief market technician at Piper Jaffray gave a reason why there were more pain days ahead for the financial stocks. Johnson stated that the technical picture for the financial stocks has remained cloudy.

Although owing to the previous situation, bank stocks could be said to have witnessed a substantial positive stress test results last week,however, their stocks still closed lower than expected last week and the chart remained unclear. The XLF reportedly bounced off support and came close to the $26.50 mark. Fingers have been crossed to see how long the recent bounce would be.

Sources claimed that the advancement in the financial stocks as compared to the declining number of the stocks remained weak since only 25% of the stocks within the financials are currently trading above their 200-day moving averages. At that rate, the stocks were still the lowest record of any S&P 500 sector.

Advancement in the financial stocks, when compared with the declining number of stocks, remained weak as only 25% of financial stocks are currently trading above their 200-day moving averages

Piper Jaffray revealed that the XLF generated positive average returns of 6% and 2.3% respectively over the last four weeks consecutively. However, some analysts mentioned that the forecast ran contrary to the usual trend of XLF performance whenever it posted losing streaks for seven days or more.

Analysts Warn Investors

Analysts have also advised investors to seek out small and mid-cap banks instead of large-cap financial institutions as the smaller cap banks were more constructive based on their breadth, momentum and, strength.

While the general market of S&P 500 index closed on a positive note in the first half of this year, Financials, however, had a poor performance during that period and the low performance weakened the overall performance of the S&P 500 index. The Financial Select Sector SPDR ETF (XLF) that tracks the performance of the financial sector reportedly dropped with about 4.7% in the first half of this year, and the XLF ETF fell with 2.1% last month. In June, Bank of America (BAC) returned -2.9%, JPMorgan (JPM) dropped with 2.6%, and Citigroup (C) dropped with 0.3%.

Financial stocks recorded poor performance in the first half of 2018 and weakened the overall performance of the S&P 500 index

Factors Affecting XLF Performance

The recorded improvements in the earning growths of core financial stocks did not have a direct impact on stocks in the financial sector. As already stated, the sector witness performed poorly in the first half, and sources claimed that the increasing trade tension affected the sector’s performance. In general, the financial sector has shown signs of weakness as several banks have had to deal with smaller margins in their trading units.

However, analysts have reported that if the three additional rate hikes of the Federal Reserve occur before the end of the year, the hikes would positively affect the US financial stocks as it would most likely lead to an increase in profit margin.

Economists have recorded that interest rate policy would continue to provide momentum for banks or any other lenders and insurers because increased rates made financial instruments that are rate-sensitive more appealing. Several rate-sensitive financial instruments are being sold and traded by banks to act as a supplement for short-term lending. Even though the demand is currently on the high among long-term borrowers, the increasing lending rates may dissuade long-term borrowing.