Financials

Looking forward, groups from the Information Technology, Health Care, Consumer Discretionary, and Financials sectors look appealing.

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Momentum and Value worked in 2013. Materials and Financials were the easiest sectors to exploit; Discretionary and Tech the most difficult. Momentum works in December; Value and Small Caps at the start of the year.

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Both models have numerous Information Technology and Financials groups in Attractive territory. Neither model has any Unattractive Tech groups. Alternatively, neither model has any Attractive Utilities groups, while several Utilities rate Unattractive in each.

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The historical batting average of this strategy has been decent, with gains in 9 of 18 years along with “excess” returns over the S&P 500 in 10 of 18 years. The best Bounce seasons have occurred when the market was either down for the year through September, or up only modestly.

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Both models (particularly domestic) have a number of Attractive rated Information Technology groups and no Unattractive rated Tech groups. Financials’ domination of the Global Attractive range continues.

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We’ve noted before that profit margin gains since the technology boom have been primarily a Large Cap phenomenon.

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Year-over-year EPS growth rate for companies with Q2 reports (with about 65% in) currently stands at +4.2%, while revenue growth has come in at a better than expected +2.6%.

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But Information Technology rises to the top of the Domestic model, while the trend of Financials domination in the Global model remains intact.

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Our Domestic Scores have five Financials groups rating Attractive; these same five industry groups are Attractive in our Global model. In total, seven Financials groups rank Attractive in the Global model, with insurance groups looking particularly Attractive.

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Market in gear, with almost all market indices hitting new highs in tandem. Would be unusual for a market correction with this type of uniformity.

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Bubble groups rarely return as market leaders until after experiencing a prolonged trading range pattern. Technology currently appears to have paid its dues and could develop into the next market leader.

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Eric Bjorgen takes an expanded look at some fundamentals surrounding the Financial sector. While bank failures are rising, prior history shows that good performance can still be produced in this environment.

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We have maintained that the mere fact that the Financials sector has been successful in raising capital via new equity issuance in the stock market is a good sign that the system is stabilizing. The aftermarket support for these deals indicates a healthy secondary market, and furthermore, points to the presence of ample stock market liquidity.

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Think we’ve never seen such turmoil in the financial sector? Back in 1986-1995, the S&L crisis wiped out about half of the federally insured thrifts (from 3234 to 1645).

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In our equity portfolios we have avoided much of the Financial sector’s collapse, but unfortunately suffered a hit on the Regional Bank stocks over the past two months. The group faded to Neutral in our GS Scores this month and has been deactivated.

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With or without Financials, earnings momentum has been gradually deteriorating over the past two years as sales growth slowed and margins have been pressured.

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GS Scores in April put Regional Banks in Attractive zone for the first time since October 2006. Valuations show the Regional Banks to be relatively cheap, and Insiders are buying.

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Expect more downside for Financials, based on the sector’s percentage of S&P 500 market cap, as well as percentage of earnings. An S&P Financial sector weight of 15% may mark the bottom.

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Performance of today’s Financial sector is somewhat tracking the performance during the S&L crisis. Paints bleak picture of what may lie ahead.

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