Are Banks Finally About to Catch a Bid?
Are financials about to rip higher?
Last month I wrote to you about the concept of “rotation.”
Rotation is when capital moves from one sector to another. Typically, it consists of capital moving from winning industries to industries that are lagging behind.
Thus far, since the markets bottomed on March 23, 2020, tech has been the big leader – particularly e-commerce companies like Square (SQ).
Meanwhile, financials such as JPMorgan (JPM) have lagged behind.
Based on these trends, I recommended subscribers of my Strategic Impact newsletter move into Square (SQ) in mid-June. Just this morning, we closed out that position for a 29% gain in a matter of weeks. (Click here to learn more about Strategic Impact.)
But now I’m beginning to wonder if we’re about to see capital rotate out of companies like SQ and move into companies like JPM.
The Macro Themes That Would Trigger a Rally in Financials
JPM’s chart looks VERY bullish.
JPM shares have held support (red line in the chart below) during their recent drop. Even better, they’ve just broken out of a falling wedge formation (blue lines in the chart below).
What would trigger a rally here?
One thing would be if the economy continues to improve.
Big banks make their money by collecting interest on the loans they make to clients. Because of this, during times of economic weakness when default rates jump, the banks tend to lag behind the market.
We saw this in 2007, when JPM shares peaked in April of that year. At the time, the broader market continued to rally another six months before peaking in October of that year. So JPM underperformed the broader market for six full months.
Is the opposite happening today, in that the economy is now improving and it’s time for JPM to catch up? The charts suggest this could be the case. And while I’m not 100% convinced of this yet, it’s a potential trend worth paying attention to.
Editor, Money & Crisis