Financial fireworks

  • Financial sector led Wednesday’s market rally
  • Sector was one of the weakest areas of market last year
  • It’s that time of year: Financials set to kick off earnings season next week

If you plucked a financial stock out of a hat yesterday, chances are you saw a chart that looked something like this:

Chart 1: US Bancorp (USB), 10/26/20–1/6/21. US Bancorp (USB) price chart. Bank breakout.

Source: Power E*TRADE

US Bancorp’s 6%-plus pop in early trading, which broke the stock out of its recent short-term consolidation, was echoed in a wide range of financial names, but especially banks. The S&P 500 (SPX) financial sector quickly jumped more than 4%—more than three times as much as the SPX itself.

Financial stocks were one of the weakest sectors of 2020, but their end-of-year surge may shed some light on yesterday’s action. The stock market’s strong performance in the final two months of the year unfolded as a bitter presidential election finally concluded (November), and COVID vaccine approvals amped up hopes of an accelerated economic recovery (December).

Yesterday marked the true end of the election cycle with the Georgia run-off vote, removing the final element of uncertainty from the political picture and raising the prospect of more economic stimulus1—a potential boon for financials. In other words, if yesterday’s news was evidence of a potential market-wide “risk-on” moment, it makes sense that financial stocks would be one of the major beneficiaries. (And don’t forget enthusiasm surrounding earnings season, which kicks off next week with numbers from big banks and other financial companies.)

A lower-profile financial stock, Axos Financial (AX), jumped even more than USB yesterday (up more than 10% intraday), highlighting another momentum theme:

Chart 2: Axos Financial (AX), 5/18/20–1/6/21. Axos Financial (AX) price chart. Second-chance trades.

Source: Power E*TRADE

First, AX is a small-cap online bank that rallied 61% in the fourth quarter. Lest we forget, one of the biggest stories of Q4 was the surge in small cap stocks, and yesterday dished up more of the same—the Russell 2000 (RUT) was up nearly 5% at 1 p.m. ET, more than three times as much as the SPX.

But traders cautious about chasing runaway moves may find a useful template in last October’s breakout above the June–August highs. Although that move wasn’t nearly as explosive as yesterday’s, the stock followed a path familiar to many long-time traders: The stock rallied nearly 7% over the next couple of weeks, but over the next three days it pulled back sharply to test the breakout level before resuming its rally.

The price action after AX’s even bigger (14%) rally on November 9 puts a slight spin on this pattern. This time the stock didn’t come close to testing the breakout point, but it still pulled back three days after the big up day, giving bulls a chance to buy the stock at a slight discount.

Whether yesterday’s rally signals the beginning or end of a move remains to be seen. But even traders who anticipate further upside in financials may be looking for some type of “second-chance” trade opportunity before pulling the trigger.

Note: USB is currently scheduled to release earnings on January 20, AX on January 28.

Market Mover Update: Oil bulls kept pressing yesterday, pushing February WTI crude oil futures (CLG1) above $51/barrel and helping keep a bid under energy stocks. Moderna (MRNA) reversed Tuesday’s slide with a 7% intraday rally yesterday (see “Lining up price and volatility patterns”).

Today’s numbers (all times ET): Challenger Job-Cut Report (7:30 a.m.), International Trade in Goods and Services (8:30 a.m.), Jobless Claims (8:30 a.m.), ISM Services Index (10 a.m.).

Today’s earnings include: WD-40 (WDFC), Walgreens Boots Alliance (WBA), Conagra Brands (CAG), Bed Bath & Beyond (BBBY), Constellation Brands (STZ), PriceSmart (PSMT), Micron Technology (MU).

For an investment perspective on the financial sector, check out 5 Reasons to Consider Investing in Financials from our colleagues at Morgan Stanley.


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1 Barron’s. Bank Stocks Are a Winner in the Georgia Vote. 1/7/21.

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