Weakest Banks/Financials In The S&P 500

Along the same line of thinking as a momentum sort I explained in early June, and recapped with some performance numbers in late August here, I decided to run a list of the weakest banks and financials in the S&P 500 (a larger group than the concentrated S&P 100 mega-cap index from June). The methodology for finding the “weakest” financials was to do a full Victory Formation sort of the entire index. Then, break out only banks, insurance companies, and other financials.

From this whittled down list, I decided to use the same three successful indicators from the June article, with a 6-month sort period to generate a final score. (1) A direct performance comparison to the S&P 500 index, (2) changes in the daily Accumulation/Distribution Line, and (3) fluctuations in the daily Negative Volume Index are equally weighted to cut the list to the worst ten equities for technical momentum.

Image Source: IBM Blue Gene Supercomputer

For investors, the clearest and primary picture of winning/losing is to review price change over time vs. a peer index. In this instance, relative price strength or weakness vs. the S&P 500 over a 6-month period holds some of the best predictive value, from my work.

The second sort measurement is the Accumulation/Distribution Line [ADL]. ADL measures the closing print inside the daily high/low trading range. If a stock closes nearer the low, we can extrapolate that selling took place intraday. While not a perfect indicator of future price direction, this historical record of recent patterns has proven useful when part of a larger formula.

The final stat for this momentum creation is the Negative Volume Index [NVI]. This indicator only counts price change multiplied by trading volume on falling volume days vs. the last session. Large price changes on low volume, quieter news days can pinpoint supply/demand issues, especially among professional traders and institutions. Future stock price gains/losses can (and do) happen without advance warning from the NVI. However, the NVI is a great tool for identifying changes in trend and measuring the underlying health of a stock, more often than not.

A basket of blue chips in the same sector tend to remain in a trend, either up or down, if these indicators are moving together.

Why are Banks/Financials Failing Investors in 2020?

I have explained for many months the macro view to avoid banks and financials, with my latest effort a few weeks discussing the idea of shorting Citigroup (NYSE:C) here. A sliding U.S. dollar trend and record overvaluations in the overall stock market during August-September have only increased the “stacked” odds against big bank and related enterprise gains. The opposite of strong demand for gold/silver hard money assets in 2020 has been the shunning of U.S. financials by foreigners and smart forward-looking investors in America. I discussed in my Citigroup article the growing similarities of today’s backdrop to the summer of 1987 stock market, just before a 40% market crash. While a rerun debacle is not guaranteed into the November election, I strongly believe Wall Street has a tough road immediately ahead.

My worry is the sliding U.S. dollar value is adding pressure to financials to underperform the general market, as has been the case since the Federal Reserve began its record money printing response to the COVID-19 pandemic in March. Below are 1-year charts of the U.S. Dollar Index, the Financial Select Sector SPDR (XLF) and the S&P 500 index, with a spread comparison chart of the XLF vs. the S&P 500. Note: The banks and financials peaked in December when priced against the general market and have led it lower all of 2020.

Here is my computer sort list of the “Bottom 10” financial equities in the S&P 500, using nine different technical indicators of buying/selling momentum trends, over several time periods under six months. I am short many of the selections and consider this group a solid Sell or Avoid list for your portfolio over coming months.

Below are charts of the worst momentum picks in this sector through September 14th, including: American International Group (AIG), Franklin Resources (BEN), Bank of New York Mellon (BK), Citigroup, Chubb (CB), Hartford (HIG), M&T Bank (MTB), People’s United (PBCT), Wells Fargo (WFC), and Zions Bancorp (ZION).

Final Thoughts

Large blue chips tend to hold their momentum longer than smaller capitalization equities. Since it is harder for sellers to turn prices lower for a prolonged period in a deep dollar marketplace, when such a trend materializes, investors should pay attention. Reversals or turnarounds into a regular rising price situation can often take time to appear, giving buyers (and short sellers) time to get into a long position. Sometimes, a major positive change in one of the variables keeping pressure on the stock will turn investor sentiment and pricing. Otherwise, weak stocks can continue to underperform for many months, even years, if the reasons for selling persist.

I have written bearish articles on Citibank, Wells Fargo, and M&T Bank (among others) specifically on Seeking Alpha since the spring. They have remained in serious underperformance price trends for months, and I don’t see much hope for a quick turnaround. The lingering coronavirus pandemic and a now massive, structural sovereign fiscal deficit mean higher taxes and lower federal spending (locally as well) are coming in 2021-22 no matter who controls Washington DC politics.

Believe it or not, it is entirely possible next year’s economy will be just as weak as 2020, creating all kinds of loan default and collapsing interest income problems for the big banks. Financial services and insurance corporations would greatly suffer from a double-dip recession and/or another stock market swoon, as customers disappear and investment portfolios move in the wrong direction. And, if we fail to cut deficits next year, we may have to deal with a collapsing currency and out-of-control inflation, both huge negatives for bank/financial asset portfolio values. Yippie!

I am using bank/financials as a short position in my diversified long/short portfolio. A period of “underperformance” vs. the S&P 500 index may continue well into next year. For my money, I will look to cover them if “outperformance” against the S&P 500 index appears for a month or two. Cutting your losses in short picks is important to manage overall portfolio risk.

Investors should understand that shorting involves greater risk than a regular long approach to investing. You can lose more than you invest initially, if unexpected good news propels a stock significantly higher. I suggest shorting a large number of individual stocks with your capital only as a hedge against your investments on the long side. Small short positions and a net-neutral to somewhat net-long portfolio design overall will keep bearish short-sale picks from ruining your day, when one or more invariably outperform the market.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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Disclosure: I am/we are short AIG, C, MTB, WFC, XLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

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