XLF- Economic update, Liquidity and Financials (chart heavy)

25 พ.ย. 2023

J.C. Parets had a great post today identifying an 8 month high for XLF financials and a break above its descending wedge.
x.com/allstarcharts/status/1728423376992022974?s=20

This is a deeper dive into the technicals for the sector, beginning with a look at the broader economy and central bank liquidity.

Economic outlook

The economy remains resilient. Broad economic variables continue to expand. This chart monitors:

• Non-farm payrolls
  
• Consumption
  
• Household employment
  
• Real GDP
  
• Gross industrial output
  
• Real personal income less transfer payments
  

Note that real GDP and real personal income have descended from their highs but remain strong.




Liquidity is up

There is a high correlation between expanding and contracting central bank liquidity and risk assets. We see risk assets drawdown on a lagged basis when central bank liquidity tightens quickly, and expand when central banks inject liquidity. The end of September saw liquidity tighten to its lowest level since 2020. Equities drew down to a local low 4 weeks later. Central bank liquidity has increased by 100B over the past week and 500B over the past two weeks. Risk assets are rallying in correlation.



Note the XLF correlation with liquidity and with the S&P




Sector rotation
Sector leadership is beginning to shift. Over 13 periods, we can see

• Leading - Tech, discretionary, utilities, industrial, and financial
  
• Improving - Energy, staples, health care, materials
  

Rotation within financials
Looking at the rotation within financials we can see some predictable trends. When the market is fearful of the financials sector there is a rotation into JPM. During recessions and market turbulence, JPM gains relative strength to the sector, regional banks, and other large US banks. This trend reverses during expansion.



We can also see progression when we compare the recoveries of XLF, IAK insurance sector, and a cohort of 3 large fintech companies. The cohort of V, INTU, and FI advance first, followed by insurance, and then lagged by the broader financial sector.



We observe a very consistent breakout among large influences to the sector with JPM, BRK.B and BLK.


Game plan
I'm looking for confirmation similar to what we saw with IAK and INTU. 65-70% of the time, we see breakouts of these formations retest the breakout area. From there I will look for opportunities between 38-39 to take profit. These align with the 1.618 and 2.0 extensions from the most recent retrace as well as a proportional movement from a measure within the pattern. The beauty of playing this pattern in this manner is that we can confidently set a tighter stop, as a full candle close back into the descending wedge will invalidate the opportunity.