You can’t get a lot more boring than we got yesterday in the broad stock market….as the major averages finished the day pretty much unchanged on the lowest volume day of the year so far. This action (or non-action) is not a big surprise. We’re just beginning the new quarter, so institutional investors don’t feel the need to “window dress” their portfolios like they do at the end of a quarter. Also, the stock market is trading at a new all-time high…and it’s very expensive. Since we’re still about two weeks away from earnings seasons (and at least 3 weeks from the meat of that earnings season), it’s not surprising that investors are sitting on their hands a little bit…in order to make sure that the fabulous year for earnings that the consensus is looking for will come to fruition.
Jamie Dimon made some headlines this morning by saying that the boom we’re experiencing right now could last until 2023. That’s great, but as we have been saying for some time now, we’re not questioning whether the economy is going to do extremely well going forward. We’re only asking whether the stock market has already priced-in that growth…given that it is trading at 23x forward earnings and 3x sales. (That price-to-sales number is a much better number to follow. Companies can do things to make their EPS look better than they really are…they can’t do that with sales.) Since that price-to-sales ratio of 3.0493 is the highest number in history (MUCH higher than it was in 2000), it shows that this stock market is an extremely expensive one. (1st chart below.)
Of course, valuations are a HORRIBLE timing tool, so the stock market could certainly continue to rally for a several weeks…or even several months. We do not believe it can rally in a significant way from here, but there’s no question that it might indeed move a bit higher. With this in mind, we’d like to highlight something on the bullish side of things in the financial stocks.
We turned very bullish on the financial stocks (especially the banks) back in late September…and the XLF financial stock ETF rallied 50% into the month of March after we made that call…while the KBE bank ETF rallied 95%! However, we turned a bit more cautious on the banks on a short-term basis in mid-March. Since then, the XLF has been unchanged…while the KBE has fallen 5%. We think there still some more downside potential over the short-term….because the weekly RSI charts on both ETFs are still quite overbought. Therefore, we believe the sector has to work-off more of this overbought condition before it resumes its longer-term rally.
Having said this, we still love the financial sector on a longer-term basis. First of all, as we have highlighted many times over the past several weeks, an important change in the longer-term trend in for long-term yields has changed…and thus we believe these yields will continue to rise over time (even if they don’t rise further immediately)……Second of all, the Fed says they’re willing to let inflation run hot…which is another way of saying that they’re willing to let long-term yields continue to climb. In other words, the old saying, “Don’t fight the Fed” is now taking on a different meaning than most people realize. They’re willing to let long-term rates rise further…which means the yield curve should continue to steepen over time…which means the financial stocks should do very well after they work-off their short-term overbought condition in a more meaningful fashion.
A third reason to like the financial stocks on a longer-term basis is due to the fact that the XLF is getting very close to seeing a “golden cross” on its WEEKLY chart. Believe it or not, we have not seen a “golden cross” on the XLF on its weekly chart since 2012! Once that “cross” was confirmed back in 2012, it was followed by a further rally of 166% over the next five years!!! Therefore, if/when we get a confirmed “golden cross” in the XLF’s weekly chart, it should tell us that another strong rally leg for the group will follow…and last for a significant amount of time. (2nd chart below.)
We talked about this issue in an interview with CNBC yesterday. You can see the interview right here: Financial stocks set up for extremely bullish move, chart suggests (cnbc.com)
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Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.