Editors' pick: Originally published Nov. 15.
The global financial sector is on fire this fall.
With the black clouds of the U.S. presidential election finally cleared, investors are betting that a Trump presidency will come with the one-two punch of lowered financial regulation and pressure on the Federal Reserve to hike interest rates, two big drivers that could spell bigger profits for financial sector stocks. But you don't even have to be aware of those catalysts to realize that something big has been going on here: in the four trading sessions since the vote results hit, the Financial Select SPDR ETF (XLF) has rallied 10.7%.
Just to put that in a little perspective, almost 75% of XLF's price performance in 2016 has come in those last four trading days...
And right now, the challenge for investors looking to take advantage of that huge momentum surge in the financial sector isn't necessarily finding stocks that are pointing higher - most are. The challenge is finding financial sector trades that haven't already become super extended.
So, to tamp back risk while taking advantage of big-cap breakouts in the financial sector, we're turning to the charts for a technical look at four big financial sector breakouts to buy after the election - and one to sell.
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...
HSBC Holdings plc
Up first on our list of financial sector breakout trades is $156 billion global bank HSBC Holdings plc (HSBC) . Don't get fooled by the headline numbers in HSBC this year - shares may be hovering around breakeven year-to-date, but they're up more than 35% from their April lows. And after tracking sideways for the last couple of months, HSBC is back in breakout mode this week.
HSBC has been forming an ascending triangle pattern since back at the end of August. The price setup is formed by a horizontal resistance level up above shares at $38.50, and uptrending support to the downside. Basically, as HSBC bounces in between those two technically significant price levels, it's been getting squeezed closer and closer to that aforementioned $38.50 price ceiling. The breakout finally happened just a few sessions ago - but there's still time to pull the trigger on the buy signal if you haven't already.
Relative strength, the indicator down at the bottom of HSBC's price chart, is the additional piece of evidence for the breakout that investors should be paying attention to here. Our relative strength line, with measures this stock's outperformance versus the rest of the broad market, has been in a well-defined uptrend since July - as long as that uptrend in relative strength remains intact, HSBC is statistically more likely than not to keep on outperforming.
We're seeing the exact same price pattern playing out in shares of $29 billion risk and insurance consultancy firm Aon plc (AON) . Aon has been a strong performer for all of 2016, up 20% since the calendar flipped to January. But don't worry if you've missed the move - an ascending triangle pattern is signaling a second leg higher here. For Aon, the breakout level to watch is resistance up at $113.
What makes that $113 level so significant for Aon? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, 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 AON's shares themselves.
The $113 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 $113 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Aon is within grabbing distance of that $113 breakout level this week; it makes sense to keep a close eye on shares here.
Lloyds Banking Group
Meanwhile, 2016 has been a pretty awful year for UK-based financial services firm Lloyds Banking Group (LYG) . Since the start of 2016, this $53 billion banking and insurance giant has shed 30% of its market value, underperforming its other financial sector peers by a huge margin. That's the bad news. The good news is that long-suffering investors could finally be in store for a reprieve this fall.
Lloyds is currently forming a double bottom pattern, a bullish reversal setup that looks just like it sounds. The double bottom is formed by a pair of swing lows that bottom out at approximately the same price level. The buy signal comes on a breakout above the peak that separates that pair of price troughs - in Lloyds' case, that breakout level to watch is resistance up at the $3.30 level. There's still some room for shares to move higher before hitting that $3.30 breakout level, which means patience is a virtue in the Lloyds trade.
The double bottom in Lloyds is a long-term trading setup - it's been taking shape since the Brexit torpedoed UK financial stocks back in June. The long-term nature of the double bottom in this stock comes with long-term upside implications once the $3.30 level gets taken out. After that, the path is clear for a retest for prior highs up at $4.40.
You don't need to be an expert technical trader to figure out the price action in shares of $10 billion payment services stock Western Union (WU) . Instead, the price action is more or less as simple as it gets. Since January, Western Union has been a "buy the dips stock", bouncing its way higher in a well-defined uptrend. And shares are showing traders another buyable dip this week.
Western Union's uptrending channel is formed by a pair of parallel trendlines that have identified the high-probability range for shares to remain stuck within all year long. Every test of the bottom of that price channel so far has provided investors with a low-risk, high-reward buying opportunity for shares of WU. So, as this payment network comes off trendline support for the fifth time since January, it makes sense to buy this bounce higher.
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, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring Western Union can actually still catch a bid along that line before you put your money on shares.
Not all financial sector stocks are screaming buys right now. In fact, Visa Inc. (V) is a prominent one that's showing the opposite type of technical trajectory this week. Visa sold off hard on Monday, declining more than 4% in a move that analysts pinned on investors eschewing card payment companies because of excessive ex-U.S. revenue exposure and the increased attractiveness of actual card issuers, like banks, in a rising rate environment.
Whatever the reason, the message is pretty clear from a technical standpoint: Visa's chart is broken.
That comes as somewhat of a surprise. Visa had actually been forming a bullish price setup for the last few months, but that all changed with yesterday's violation of trendline support just above $81. That trendline break opens up material downside risk for Visa here, and shares lack any meaningful pocket of support until the $74 level. Put simply, it makes sense to wait for Visa to find a floor and then start establishing higher lows again before trying to build a position in this stock. It's too early to try and pick out a bottom in Visa at this point. Caveat emptor.