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Financials on the Ropes; XLF Underperforms

David Becker
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Financials on the Ropes; XLF Underperforms

Financial stocks are trading on the defensive and have underperformed the broader markets so far in 2014. Many believe that a steepening yield curve where longer rates moved higher versus shorter rates would help banks generate more profits and outperform in 2014 as long rates started to back up. Yield have performed better than expected, as the 10-year is now closer to 2.7%, then the 3% projected to end the 1st quarter by most economists.

Regulation and capital requirements continue to plague the large financial institutions. Citibank (NYSE:C) actually failed the Federal Reserve’s stress test and was unable to over shareholders a buyback of stock or an increase in dividends.

U.S. regulators voted to raise the leverage ratio at banks to 5-6% of their total assets, well above the Basel III standard of 3%, which will now force the eight largest U.S. banks to hold another $68 billion in loss-absorbing capital. The banks affected include JPMorgan (NYSE:JPM) , Citigroup, Bank of America (NYSE:BAC) and Goldman Sachs (NYSE:GS) . The eight firms have until January 1, 2018 to comply with the new rule.

The financial select sector as a spread to the S&P 500 Spider select moved below both the 50-day and 200-day moving averages, and is poised to test the 2014 lows. The spread which is the financial ETF divided by the S&P 500 ETF shows that financial have underperformed during 2014. The technical point to a lower spread as the MACD (moving average convergence divergence) index generated a sell signal on the spread. This occurs as the differential between the 12-day moving average minus the 26-day moving average) crossed below the 9-day moving average of the differential. The RSI moved lower with the spread reflecting accelerating negative momentum, while printing near 43, which is on the lower end of the neutral range.

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