In a narrow market with many weak Sectors the XLF has a middle of the pack grade in our Elev8 Sector Model. Given the context of an 18-month bull trend for the S&P 500 we expect XLF to inflect positively at some point in 2024. Now that we can see some abatement in downside momentum, we are hopeful that is going to come sooner than later.
Price Action & Performance
XLF had a rough June, but the month ended on a somewhat positive note with price turning up from a higher low on the chart. Market internals as measured by the % of stocks within the XLF that are above their 50-day moving average reached wash-out levels on June 14 and have been improving since then. Oscillator work for the XLF has been stuck in neutral. As we mentioned in the lead-in, XLF is only somewhat attractive relative to its peers. On an absolute basis, the technical are neutral at best. That said, some signs of improvement to close out June are nothing to sneeze at as the environment has been miserly for any sector outside of XLK and XLC over the past 3 months.
At the industry level, Banks and Consumer Finance stocks are holding up best within the XLF. Banks continue to trace out a constructive longer-term base post the 1Q2023 bank run that put them in the cellar.
Economic and Policy Drivers
Lower inflation readings have helped reflate many bank balance sheets which had been over-indexed to the long end of the curve back in 2022 when the Fed. was telling us nice stories about transient inflation and no expected rate hikes. Now that inflation is at least at a stable level with potential to further ameliorate, Banks are being let off the mat. Any rotation away from Tech/Growth/Mega Cap. leadership would likely redound to the benefit of all sectors, but in the meantime, Financials will likely benefit from any momentum the Trump campaign can gain as election season ramps given his legacy of cutting taxes for the wealthiest. Interest rates remain a key pivot with the current levels coinciding with decreased demand for mortgages in a housing market that remains tight. Consumer debt defaults will be a series to watch as interest rate burdens push more lower income households to borrow and more indebted borrowers to default.
How Can XLF Help?
XLF offers market weight exposure to several industries that are often hard to differentiate at the stock level including Banks, Investment Banks and Brokerage Houses, Asset Managers and Insurance stocks, Rating Agencies and Exchanges. It has a large Value component which typically does well when inflation is on the rise, and it has been out of favor for most of the past two years which sets the table for upside surprise as expectations and sentiment have been tepid for some time. Further inflation pressures would likely force more capitulation away from big Growth Sectors and would likely benefit a wide swath of Value stocks including the many within XLF. If the economy shows resiliency, we could see re-emergence of strength in asset managers (BX, BLK), brokerage (SCHW), Consumer Finance (COF, AXP) and others. XLF offers exposure across these areas.
In Conclusion
A material correction in relative performance of XLF has undone 9 months of technical improvement from July 2023 through April of 2024. With inflation continuing to look a bit toothless, we are expecting XLF to regain some of its footing in July. Our Elev8 Sector Model continues with an OVERWEIGHT Position in XLF of +2.08% vs. the benchmark S&P 500
XLF Technicals
- XLF daily (200-day m.a. | Relative to S&P 500)
- Relative-curve is back to lateral support as price continues to consolidate sideways. Given the bullish tenor of the market and undefined leadership trends beyond XLK and XLC, XLF has an edge in our model projections
Data sourced from Bloomberg
