How A Forgotten Sector Saved the Dow

Even the Dow dogs have their day.

The beaten-down Dow Jones Industrial Average surged higher during Monday’s session. It jumped 320 points by the closing bell to post its best trading day in four weeks.

Monday’s broad market rally was led by two beaten-down groups: industrials and financials. These are two sectors most investors had left for dead — until now.

Yesterday’s big bounce came just in time. Trade war rhetoric has pummeled these stocks for the better part of the past several months. The Dow has remained stuck in a choppy range for most of the year. Even after yesterday’s surge, the blue-chip index is barely in the green for the year. Meanwhile, the tech-heavy Nasdaq is up more than 12% year-to-date.

Tech stocks took a well-deserved break from their leadership role yesterday to allow the big banks and industrial stocks to play catch-up. The Financial Select Sector SPDR (NYSE:XLF) gained nearly 2.3% yesterday to post its best showing since May.

To put the move into context, the financial ETF posted its longest losing streak of all time in June, finishing in the red 13 sessions in a row, per data from MarketWatch. The big banks couldn’t catch a bid thanks to the double-whammy of tariff threats and interest rate concerns.

But yesterday’s big bank comeback raises an important question: Are we about to witness a fast comeback move in the financial sector?

Since the broad market topped out in late January, the financial sector has repeatedly tested support near its November highs. Each trip to these levels has prompted buyers to step in. But we’ve seen little to no follow-through.

Following XLF’s June swoon, the sector was pushing to new 2018 closing lows. The financial ETF was stuck well below its 200-day moving average and threatening a much more damaging breakdown.

That’s when the buyers stepped in…

Financials

After languishing near its lows for two weeks, the financials are finally enjoying a bounce — and it could have much further to go before cooling off.

There’s an old saying among veteran chart watchers: from false moves come fast moves in the opposite direction. Judging by the above chart, we could be witnessing the beginnings of a powerful move out of a false breakdown. The capitulation selling at the end of June marked the closing lows for the year. Then the quick rebound we’re seeing to start the trading week could turn into the catalyst for an extended rally.

The start of earnings season is an added twist to this scenario. Many of the big financial firms will begin to report earnings later this week. Is Monday’s comeback foretelling a bang-up quarter from the big banks?

We’ll have to wait and see. If this bounce is a precursor to s few positive earnings reports, we could hook a high-flying comeback trade…

Sincerely,

Greg Guenthner

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Greg Guenthner

Greg Guenthner, CMT, is the editor of The Rude Awakening Pro, The Seven Figure Formula and Profit Spy. Over the past decade, Greg has helped build the small-cap and technical research teams. His analysis has appeared in Forbes, Yahoo Finance, Bankrate, and countless other publications. Greg is a member of the CMT Association and holds the...

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