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SMO Exclusive: Strength Report Financial Sector 2024-12-31 Weakened -0.4 to 4.5 Strength Score

Brian Degracia

• 7 min read
SMO Exclusive: Strength Report Financial Sector 2024-12-31 Weakened -0.4 to 4.5 Strength Score
WEAKNESS for the week ending 12/31/24 with all four industries weakening, including one (Banking) that weakened enough to fall one strength ranking. 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.

Overview

This post consists of the following sections:

I. KEY BACKGROUND INFORMATION
II. FINANCIAL SECTOR DETAILED ANALYSIS

SECTION I: KEY BACKGROUND INFORMATION

Sector Weekly Summary

The Financial Sector weakened by 0.4 points to a 4.5 composite score this week as all four industries weakened.

Banking fell one strength rating to 4Strong, where it is tied with Financial Services and Insurance. Real Estate fell one strength rating to 6Weak and remains the sector's laggard.

Difference This vs. ETFs Analysis

Note this analysis is the same as that used for the SPDR ETFs published every Tuesday and Friday (here is yesterday's report dated December 31, 2024) 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 today's ETF strength analysis, XLF/Financials is rated 4Strong and XLRE/Real Estate is rated 6Weak, with Real Estate weakening one rating. This means the large cap stocks align with the mid-/small-cap stocks in these sectors.

December 31, 2024 strength ratings for the 11 SPDR ETFs show the XLF/Financial ETF as tied for strongest at 4Strong and XLRE/Real Estate falling one strength level to 6Weak.

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. One quick way to discern this is to look at the differing market levels in terms of headwinds and tailwinds as noted below.

Current Market and Sector Environment: HEADWIND

Current Industry/Sub-Industry Environment: Headwind

  • The Banking industry weakened one rating to 4Strong = headwind
As of December 4, 2024 92% of Banking industry stocks were rated 1Strongest. I wrote then "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." As noted below in Section II.5 STOCKS Outliers: Strongest/Weakest Rated, this figure has fallen to only 12% Banking stocks rated 1Strongest.
  • The Financial Services industry weakened but retained a 4Strong rating = headwind/neutral
  • Insurance was weakened but retained a 4Strong rating = headwind/neutral
  • Real Estate weakened one rating and fell below average to 6Weak= headwind

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. Why? Because the market does not have to be so complicated.

SECTION II: FINANCIAL SECTOR DETAILED ANALYSIS

Section Table of Contents

  1. Introduction - Industry Components
  2. INDUSTRY 1-Week Strengthening, Positive/Negative % Stocks
  3. INDUSTRY 10-Week Strengthening
  4. SUB-INDUSTRY 10-Week Strengthening
  5. STOCKS Outliers: Strongest/Weakest Rated
  6. STOCKS Outliers: 1-Week % Change
  7. STOCKS Outliers: 5-Year Highs/Lows

1. Introduction - Industry Components

Banking

Largest of 9 sub-industries (271 stocks, average 30)
- Regional - Northeast Banks (90 stocks)
- Regional - Mid-Atlantic Banks (32 stocks)
- Regional - Pacific Banks (32 stocks)
- Savings & Loans (31 stocks)
- Regional - Midwest Banks (29 stocks)

Top 10 Market Caps: JPM/JPMorgan Chase and Co, BAC/Bank Of America Corp, WFC/Wells Fargo & Company, RY/Royal Bank Of Canada, HSBC/HSBC Holdings Plc, C/Citigroup, TD/Toronto Dominion Bank (The), MUFG/Mitsubishi UFJ Financial Group Inc. ADS, SAN/Banco Santander SA, USB/US Bancorp

Financial Services

Largest of 5 sub-industries (125 stocks, average 25):
- Asset Management (46 stocks)
- Diversified Investments (38 stocks)
- Credit Services (22 stocks)

Top 10 Market Caps: MS/Morgan Stanley, AXP/American Express Co, GS/Goldman Sachs Group Inc, BLK/Blackrock Incorporated, SCHW/Charles Schwab Corp, KKR/KKR & Co. L.P., BX/Blackstone Inc, ICE/Intercontinental Exchange Inc, APO/Apollo Asset Management, PYPL/PayPal Holdings Inc

Insurance

Largest of 5 sub-industries (85 stocks, average 17):
- Property & Casualty Insurance (52 stocks)
- Insurance Brokers (12 stocks)
- Life Insurance (12 stocks)

Top 10 Market Caps: BRKA/Berkshire Hathaway Cl A, PGR/Progressive Corp, CB/Chubb Corp, MMC/Marsh & McLennan Cos Inc, AON/Aon PLC, AFL/Aflac Inc, AJG/Arthur J Gallagher & Co, MET/MetLife Inc, TRV/The Travelers Companies Inc, MFC/Manulife Financial Corp.

Real Estate

Largest of 8 sub-industries (174 stocks, average 22):
- REIT - Diversified/Industrial (49 stocks)
- Property Management/Development (33 stocks)
- REIT - Residential (24 stocks)
- REIT - Retail (17 stocks)

Top 10 Market Caps: PLD/ProLogis Inc, AMT/American Tower Corp, WELL/Welltower Inc, BN/Brookfield Corporation, PSA/Public Storage, DLR/Digital Realty Trust Inc, SPG/Simon Property Group, O/Realty Income Corp, CBRE/CBRE Group, Inc., EXR/Extra Space Storage Inc

2. INDUSTRY 1-Week Strengthening

Overview

What: A closer 1-week look at industry and sub-industry strengthening
Why: a multi-month rally begins with one up week. Meaningful moves last and can last longer than expected.

Positive/Negative % Stocks

3. INDUSTRY 10-Week Strengthening

Overview

What: A comparative 10-week look at industry strengthening
Why: clearly and quickly understand where there is strengthening and weakening over a relevant time frame

4. SUB-INDUSTRY 10-Week Strengthening

Overview

What: recent week-by-week strength changes for the industry and its sub-industries
Why: objective measurement of strengthening and weakening enabling comparison within and across industries and sub-industries

This key provides a guide for how to read the charts in this section.

Banking

Financial Services

Insurance

Real Estate

5. STOCKS Outliers: Strongest/Weakest Rated

Overview

What: stocks currently rated Strongest/Weakest (highest/lowest of 9 strength ratings)
Why: these are interesting stocks for available capital because

  1. The Strongest have the least amount of overhead supply to dampen breakouts while
  2. the Weakest may be prone to volatility, subject to big pops from bottom-fishing and short-covering BUT ALSO to bigger and faster falls.
  3. (Not guaranteed and not a recommendation - weak stocks in weakening sub-industries may be better shorts than high-flyers.)

Banking

In less than four weeks Banking has fallen from 92% to only 12% 1Strongest stocks.

Financial Services

Insurance

Real Estate

6. STOCKS Outliers: 1-Week % Change

Overview

What: stocks with atypically strong or weak performance this week
Why: these are interesting stocks for available capital because

  1. The journey to 100%+ returns begins with 10% returns...
    - Strength can beget strength
    - So too weakness
    - Momentum and trend-following are time-tested.
  2. A multi-month rally begins with one up week...
    - Meaningful moves last
    - And can last longer than expected.

Banking

Financial Services

Insurance

Real Estate

7. STOCKS Outliers: 5-Year Highs/Lows

Overview

What: stocks at 5-year highs and lows
Why: potential large and/or rapid price movement

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, until today, had been regularly hitting new highs. Meanwhile, there is no rational reason to hold weak stocks that are at multi-year lows. There are far too many other attractive choices to waste time or capital on such candidates.

This table lists the sector's stocks that are at 5-year (or longer) highs and lows.

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