It's been a nice run since the Nov. 1 follow-through day. Even better, the minor correction in April created new opportunities in May and June. But financial stocks haven't been big participants in the rally since May. Though it seems like we've been on the verge of a rotation to financials, here's what's been missing.
May Reversal In Financial Stocks Doesn't Take Hold
When looking for rotations, upside reversals are a great place to start. It suggests that a stock or ETF is making a stand and finding a level of support.
After coming in sharply for a couple of weeks, financial stocks as represented here with the Direxion Daily Financial 3X Bullish ETF bounced strongly (1). But in order to believe a downtrend has changed to an uptrend, you need a confirmation of the strength. A trend needs more than a few days to give investors a chance to make money.
The next day saw FAS get back above its 50-day moving average line (2) but then it paused for a few days. May 31 stood out relative to the market (3). As the S&P 500 and Nasdaq composite broke below their 21-day moving average lines, a number of sectors looked interesting relative to the market. Financial, utility and insurance stocks as well as small caps and midcaps were all up for most of the day, suggesting a possible rotation. But the indexes came roaring back and the rotations didn't pan out. They just didn't have any follow-through or confirmation.
Shakeouts Happen, Even In Strong Markets
A better opportunity seemed to present itself in June. Financial stocks showed a more classic upside reversal that closed down for the day but high in its closing range (4). Granted, the day before looked similar. What was different this time? The action of the next day piled on even more strength (5).
One problem with rotations is that you might have weaker relative strength lines. But you could at least see the relative strength line potentially breaking its downtrend as the price confirmed the initial reversal.
Our initial hesitation was that FAS was still trading below the 50-day line. That was fixed just a couple of days later as it jumped back above that level (6).
John Kosar discusses how this year has produced some of the quickest rotations he's ever seen.
A brief one-day pause tested the 50-day line but managed to stay above it (7). We added the financial stocks ETF to SwingTrader the next day as we seemed to have a more solid break of the downtrend that started in May (8). It was a solid week of gains.
The Missing Link
But the next day the weakness returned (9). FAS went back below its 50-day line and many financial stocks started undercutting areas of support. This has been one of the difficulties of the current market. Many of these potential rotations that start with reversals haven't gotten the follow-through. If it does happen for more than a day, the rotations are lasting no more than a week. It makes progress tougher.
The only way to combat it is to keep losses small. We didn't give the financial stocks much room to hurt us with a large loss. The trade still might work, but it showed us it wasn't ready yet because of the confirmation of strength didn't last.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
