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SMO Exclusive: Strength Report Financial Sector 2024-11-13 Strengthened +0.2 to 3.1 Strength Score

Brian Degracia

• 6 min read
SMO Exclusive: Strength Report Financial Sector 2024-11-13 Strengthened +0.2 to 3.1 Strength Score
Note in the graphic that it is possible for an industry to NOT change strength rating yet still "strengthen" or "weaken" for the week. The reason for this is that underneath the surface there can be movement that is directional but not considered material enough to change the strength rating. Taken in the aggregate over the sub-industries that make up industries and then sectors, this can provide helpful insight into the underlying currents at each level.

Summary

Financial Sector slightly STRENGTHENED with a 3.1 composite score this week, +0.2 as Financial Services strengthened one level to 3Stronger, tied with Insurance but behind the strongest industry Banking which is at 2VeryStrong. Real Estate remains the sector's laggard with a 5Average rating.

Difference This vs. ETFs Analysis

Note this analysis is the same as that used for the SPDR ETFs but the two main differences are:

1. Universe of stocks. The ETFs are the largest capitalization stocks, 500 of them in the 11 sector ETFs. In this analysis, there are approximately 2,700 stocks.
2. Sub-categorization below the market level. The ETF analysis with 500 stocks is limited to sector strengthening and weakening. This analysis with +/-2,700 stocks can be and is segregated into 29 industry groups and in turn 189 sub-industry groups.

There is a Financials ETF (symbol XLF) which is separate from the Real Estate ETF (symbol XLRE). The Financials sector in this analysis includes Real Estate with Banking, Financial Services, and Insurance.

Per yesterday's ETF strength analysis, XLF/Financials is rated 3Stronger and XLRE/Real Estate is rated 4Strong. This is generally a match for the Banking, Financial Services, and Insurance readings from today, and is slightly stronger than the Real Estate Industry 5Average rating from today's analysis which covers more stocks. This means the larger cap Real Estate stocks are stronger than the small caps.

How would I interpret and use this information?

Recognizing that anything can happen at any time and I will never know the reason why until after the fact if ever, I am looking to give myself the best chances of an individual stock going my desired direction by stacking strength going long or stacking weakness going short, depending on strength/strengthening and weakness/weakening at the stock, sub-industry, industry, sector, and market levels.

Following are summary statements regarding the current environment:

  • The Market Strength Score is now positive = tailwind
  • Financial sector slightly strengthened = tailwind
  • Financial Services industry strengthened rating to 3Stronger = tailwind
    • Asset Management strengthened rating by one level = tailwind
    • National Brokerages weakened rating by two levels = headwind
  • Banking industry was unchanged while still retaining a 2VeryStrong rating = tailwind/neutral
    • Southeast Banks strengthened rating by one level = tailwind
    • Foreign Regional and Mid-Atlantic Banks weakened ratings by one level = headwind
    • Interestingly, Banking suffered this week from a 30% positive vs. 70% negative stock ratio - no predictions, but this reflects an unexpected weakness = headwind
88% of Banking industry stocks are rated 1Strongest (see pages 5.1 to 5.3 below). There is no way to determine how long this will last. This trend started somewhere and one cannot benefit from this knowledge - where that trend began - unless one is tracking this.
  • Insurance weakened but not enough to change rating while still retaining a 4Strong rating = neutral
    • Life Insurance weakened rating by one level = headwind
  • Real Estate like Banking was unchanged but it is only at a 5Average rating, there are better industry choices = neutral
    • Mortgage Investment and Diversified/Industrial, Hotel, and Retail REITs all weakened rating by one level = headwind
The Mortgage Investment and Diversified/Industrial REITs sub-industries are now rated 6Weak - the only two of 27 sub-industries that are rated below 5Average. (See pages 4.4, 5.6, and 6.4 for Real Estate details.)

Final Comments

There is absolutely no way of determining how long this environment will last. All one can do is find an objective way of measuring whether any given environment offers headwinds or tailwinds and then act accordingly based on these measurements.

This methodology measures what IS, acts accordingly based on objectively set rules, and never attempts to make predictions. As the market environment facts change based on systematic and repeatable measurement, then so do the appropriate actions.

Details are below shown in a manner not available elsewhere because I created it from scratch to continually answer this question: “Where is there strengthening and weakening in the market at the stock, sub-industry, industry, and sector levels?” Combine this with the top-down Market Strength Score and Sector Risk Gauge to get a key competitive advantage of understanding strength at every level.

1. Introduction

2. Industry 1-Week Strengthening

3. Industry 10-Week Strengthening

4. Sub-Industry 10-Week Strengthening

Note that Banking, Financial Services, and Insurance sub-industries for the past 10 weeks have all remained primarily on the Strong side of the ledger - that is, to the right of 5Average (see pages 4.1 through 4.3). In comparison, during this period some of the Real Estate sub-industries have fallen into the Weak side of the ledger, to the left of 5Average (see page 4.4). In fact, now two Real Estate sub-industries are rated 6Weak, the only ones out of 27 Financial Sector sub-industries.

5. Stocks Outliers: Strongest/Weakest Rated

Note Banking pages 5.1 through 5.3 shows minimal changes in ratings for any individual stocks. Meanwhile, Real Estate page 5.6 shows a fair number of both strengthening and weakening stocks that changed ratings during the week.

6. Stocks Outliers: 1-Week % Change

Banking Page 6.1 shows a 30/70 split of positive vs. negative stocks for the week but had no major outliers greater than +10% or less than -10% in terms of return for the week. Note the detail revealing large outliers on each industry page - these can flag newly "in-play" stocks.

7. Stocks Outliers: 5-Year Highs/Lows

This section shows the strongest of the strong and the weakest of the weak, hitting 5-year highs and lows, respectively. The strongest are the leaders of the market that is hitting new highs. Meanwhile, there appears to be no rational reason to hold weak stocks that are at multi-year lows despite massive market tailwinds.

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