How to Trade Bank of America, Goldman Sachs and Morgan Stanley on Earnings

Financial correlations are sky-high. Here's the one trade to take advantage.
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It’s earnings season and that means some of the biggest financial institutions are reporting their quarterly numbers this week.

Bank of America  (BAC) - Get Report, Morgan Stanley  (MS) - Get Report, Goldman Sachs  (GS) - Get Report, Citigroup  (C) - Get Report and Blackrock  (BLK) - Get Report are just a handful of the dozen-plus financial sector S&P 500 components who have reported or will be reporting this week.

On balance, the earnings numbers have been good. The financial sector has posted the strongest top-line surprise of any other sector so far this season. We’re still early in earnings season here, but about 80% of financial sector names have delivered positive price reactions to earnings so far.

The good news is that you don’t need to keep track of what’s happening in every stock in the financial sector to make money from the earnings move. That’s because despite all of the names in the sector, it all boils down to a single trade.

To figure out how to play it, we’re turning to the charts for a technical look at what’s happening in financials this earnings season.

When I say that there’s only one trade in financials right now, what I mean is that all the major financial sector stocks are showing off virtually the same chart right now. Have a look:


(Alright, the one exception is Wells Fargo  (WFC) - Get Report, which fell off a cliff following an earnings whiff this week).

In short, financial sector correlations are through the roof right now. And what that means is that trading any individual issue this earnings season effectively boils down to a bet on idiosyncratic risk. As the negative earnings reactions in Wells Fargo and Bank of America this week show, that’s not necessarily a good thing.

So, what’s the alternative? Take a look at the SPDR Financial Select Sector ETF  (XLF) - Get Report:

Screen Shot 2020-01-15 at 11.26.52 AM

No surprise, XLF’s chart looks the same as pretty much all of the individual names in the financial sector. The difference is that you can play the bullish technical setup in shares in XLF without the exposure to the single-stock earnings risk you’d get by trading an individual name.

And the setup in XLF looks bullish indeed.

Since mid-December, shares have been forming a pretty textbook example of an ascending triangle pattern, a continuation setup formed by horizontal resistance (in this case at $31) and uptrending support to the downside. Simply put, if XLF can catch a bid above $31, we’ve got a fresh buy signal in this popular financial sector ETF.

Relative strength continues to be one of the most important indicators to keep an eye on in this frothy market. And in XLF’s case, the shallow uptrend in relative strength signals that this sector has been systematically outperforming the rest of the market since bottoming back in March.

That adds fuel to a potential breakout through $31 in XLF.

Skip the temptation to trade the individual financial sector names this earnings season. With sky-high correlations, they’re all effectively showing off the same chart. Instead, look for breakout potential in XLF as the high-probability financial sector trade to kick off 2020.