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Financial Stocks - Oversold in an Uptrend

Dean Christians
2021-03-24
Financial stocks are short-term oversold against the backdrop of a strong uptrend. Let's review forward returns when 95% of members are above the 200-day average, and less than 10% are above the 10-day average.

In a note last week, I shared a study on energy stocks that showed an oversold condition in an uptrend. A similar condition has now developed for the second time in less than 2 months for financial stocks. As of 3/23/21, I show 100% of financial stocks trading above their respective 200-day moving average and approximately 7.81% above the 10-day average.
Let's conduct a study to examine forward returns when > 95% of members are above the 200-day average and less than 10% are below the 10-day average. By adjusting the thresholds, we can see more historical instances.

Current Financials Chart

Signal Performance

Except for 1961 and 1989, signal performance looks good. The risk/reward profile looks solid on almost all timeframes. I would also note that a cluster of signals leads to better outcomes. Please see the 1995-97 period.

Yield Curve with Oversold Signals

When I review trading signals for financial stocks, I like to overlap the instances on a yield curve chart. 2011 is a good example of an oversold condition in an uptrend that failed. The 10-year to 3-month yield curve contracted by almost 30 bps over a 2-week period before the signal on 2/24/11.

Conclusion: The Fed has indicated that they are in no rush to raise rates. Therefore, all else equal, the curve should remain in a position that benefits financials. Watch the yield curve. 

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Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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