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Banks and Homebuilder Stocks Showing Impressive Strength

Stock-Markets / Stock Markets 2012 Mar 14, 2012 - 07:45 PM GMT

By: Chris_Ciovacco

Stock-Markets

Best Financial Markets Analysis ArticleFinancial stocks had been treading water relative to the S&P 500 for the past six weeks. That changed late yesterday after J.P. Morgan announced a dividend increase and stock buyback program.

While the chart below looks complex, the concepts are easy to understand. The chart shows the performance of financial stocks relative to the S&P 500 Index. Here are the key takeaways for investors:


  1. The thin colored lines are shorter-term moving averages, which filter out some of the day-to-day volatility in price. The black dotted line is price, or financials relative to the market. The long-term moving average, the 200-day, recently intersected with the shorter-term moving averages. Yesterday, price spiked above the intersection of the moving averages in a bullish manner. The tight “cluster” of moving averages represented strong resistance; now they represent strong support.
  2. At the top of the chart, MACD, a measure of momentum, experienced a bullish cross on Tuesday (black line moved above red line).
  3. RSI, below price, has transitioned from a “bearish look” (see orange box) to a “bullish look” (green box), which tells us the odds favor further intermediate-term strength in financial stocks relative to the S&P 500.
  4. At the bottom of the chart, another momentum indicator, Wm %R, held above -80 during recent corrections, which is indicative of a market that is gaining traction.

A “retest” of the moving averages above may occur in the coming days. If the breakout fails to hold, it would be a negative for the entire market. If you want to take a more skeptical view of yesterday’s action, RSI did not make a new high with price in the chart above.

As shown below, homebuilders experienced a similar moving average cluster in mid-October, which was followed by a period of outperformance. A similar “breakout” from a moving average cluster occurred on Tuesday of this week. The green box shows where the shorter-term moving averages crossed the 200-day – another bullish signal. Also note the RSI similarities between homebuilders and financials (compare the green rectangles above and below).

Similar to the breakout in financials, RSI did not confirm the move in homebuilders on Tuesday. A failure to hold a breakout is always a possibility.

How does all this help us? Given what we know today, which is subject to change, the odds favor continued outperformance by financials and homebuilders. Things can turn quickly in today’s world, but when bank stocks are healthy it tends to be good for stocks in general. If the breakouts fail, it will send up a “be careful” flare for risk in general.

Ciovacco Capital Management

    Copyright (C) 2012 Ciovacco Capital Management, LLC All Rights Reserved.

    Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

    Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

    All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

    Chris Ciovacco Archive

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