Financials will keep bulls in charge

January 16, 2018 02:01 PM
The Issue With Forecasting

We look to financial sector stocks as a market leader. There has never been a bull market in U.S. stocks without participation from the banks. They don’t necessarily need to be leading but they do need to participate. 

When we see the S&P Financials Index going out at new 10-year weekly closing highs, it’s hard to be bearish stocks as an asset class. This has been a big part of the aggressively bullish case for the S&P 500 since the summer of 2016 (see “Financials lead,” below). Meanwhile, the Broker Dealers Index is holding above its former all-time highs from 2007.

These are not bearish characteristics for stocks as an asset class.

“Last major test,” right, shows that the S&P Financials Index (XLF) recently broke out above the March highs, giving us a target at the all-time high from 2007 above $30. This has been our upside target for a long time and although it is still over 10% away, the last major hurdle has been eliminated. 

The Broker Dealers & Exchanges Index (IAI) broke out above the 2007 high in November and is just getting going (see “Breakout,” below). This index appears to be leading the parade and should rally above 73, which is still another 15% higher from here. 

The strength in financials makes it hard to be a short seller in stocks. A top/down, weight-of-the-evidence approach makes it hard to ignore the evidence. If the IAI is above the 2007 highs and the XLF is above $25 and challenging its 2007 high, we need to err by remaining very aggressively bullish on stocks as an asset class. In other words, buying weakness, not selling strength.  

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