The financial sector could be turning a corner -- finally.
Financials have been lagging the rest of the S&P 500 all year long. Year-to-date, the broader market index has managed to push into positive territory as of the start of November, but financials, measured by the S&P 500 Financial Sector Index, are still down slightly on average at this point.
We're not talking about a lot of underperformance here, which is actually part of the problem. Financials aren't delivering decent returns in 2015, and they're not getting beaten-down enough to look attractive from a value standpoint either. But it looks like this unloved sector is finally turning a corner in the final stretch of the year -- and we're seeing some buyable breakouts shaping up in the financial sector.
To find the financial sector stocks that look best positioned to outperform this fall, we're turning to the charts for a technical look.
In case you're unfamiliar with technical analysis, here's the executive summary: Technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, here's a rundown of five technical setups that are showing solid upside potential right now.
Sumitomo Mitsui Financial Group
We're kicking things off on the other side of the world, where shares of Japanese banking giant Sumitomo Mitsui Financial Group (SMFG) - Get Report have been underperforming the U.S. equity markets pretty materially in the last six months. While the S&P is basically breakeven since May, Sumitomo Mitsui has seen its share price drop by nearly 10%.
But this Japanese bank is showing some signs of life this fall -- and shares are inching closer to a pretty important breakout level here.
Sumitomo Mitsui is currently forming an ascending triangle pattern, a bullish price setup that's formed by a horizontal resistance level up above shares (at $8.20 in this case) and uptrending support to the downside. Basically, as Sumitomo Mitsui bounces between those two technically important price levels, it's been getting squeezed closer and closer to a breakout above our $8.20 price ceiling. When that happens, we've got our buy signal.
Momentum, measured by 14-day RSI, provides some extra evidence for the reversal. 14-day RSI, our momentum gauge, has been in an uptrend since August, making higher lows that confirm the bullish action in Sumitomo Mitsui's price.
Don't try to get in ahead of the breakout. Wait for $8.20 to get taken out before you put your money on this trade.
Fifth Third Bancorp
$15 billion Ohio-based commercial bank Fifth Third Bancorp (FITB) - Get Report is showing investors a triangle of a different sort this month. Fifth Third Bancorp is down about 4% year-to-date, and at a glance, you'd think that shares have been churning sideways all year long. In reality, this stock actually spent most of 2015 trending upward following a sharp correction in January. And after a similarly sharp correction in August, this stock looks ready to repeat history with a prolonged move higher.
For Fifth Third Bancorp, the price pattern we're watching is a symmetrical triangle. The symmetrical triangle is formed by a pair of converging trend lines. The buy signal comes on a push through that upper blue line on the chart, currently just above $19.50. Consolidation patterns such as the symmetrical triangle are common after big moves -- they give investors a chance to catch their breath and figure out their next step. And after the big drop in August, it's not surprising that the weak hands got shaken out.
A breakout through the top of this triangle would clear the way to a retest of prior highs up at $21.50, the next meaningful resistance level for Fifth Third Bancorp. Shares saw some extra upside volume towards the end of the session yesterday. If this stock can hold that move higher, then it's time to buy.
Good news: You don't have to be an expert technical analyst to figure out what's been happening in shares of Home BancShares (HOMB) - Get Report right now. This mid-cap regional bank has been enjoying a breakneck rally in 2015, up more than 34% since the calendar flipped to January. And Home BancShares continues to be a "buy the dips stock" this fall.
Home BancShares has spent the last year or so bouncing its way higher in a well-defined uptrending channel. The channel is formed by a pair of parallel trend lines that have identified the high-probability range for shares of this stock to remain stuck within. Put another way, every test of the bottom of that channel has provided a very attractive buying opportunity from a risk/reward standpoint. And as shares come off their highs this week, traders should be getting ready for Home BancShares' next bounce off of support.
Actually waiting for that bounce is important for two key reasons: It's the spot where shares have the most room to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before the channel breaks, and you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for a bounce to happen first, you're ensuring Home BancShares can actually still catch a bid along that line before you put your money on shares. That'll take some patience from here, but it's been a repeatable trade all year long.
After spending most of the year in selloff mode, $152 billion financial services stock HSBC Holdings (HSBC) - Get Report is finally starting to look "bottomy." Here's how to trade this big international bank this fall.
HSBC is currently forming an inverse head and shoulders pattern, a bullish price setup that signals exhaustion among sellers. You can spot the inverse head and shoulders by looking for two swing lows that bottom out around the same level (the shoulders), separated by a bigger trough called the head; the buy signal comes on the breakout above the pattern's "neckline." That's the $40 level in HSBC.
Don't get thrown off by the abundance of gaps on HSBC's chart right now. Those gaps, called suspension gaps, are caused by overnight trading on the London and Hong Kong stock exchanges. They can be ignored for trading purposes.
Royal Bank of Scotland Group
Not too surprisingly, we're seeing the exact same setup in shares of another major U.K.-based multinational bank: Royal Bank of Scotland Group (RBS) - Get Report . Like HSBC, RBS is forming an inverse head and shoulders pattern, in this case with a neckline level at $10.25. A move through that $10.25 price ceiling is our signal that it's time to buy shares.
Why all of that significance at that $10.25 level? It all comes down to buyers and sellers. Price patterns, such as this inverse head and shoulders pattern in RBS, are a good quick way to identify what's going on in the price action, but they're not the actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for RBS' stock.
The $10.25 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $10.25 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. After $10.25 gets taken out, the 50-day moving average becomes a logical place to park a protective stop.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.