June 3 Closing and Financials to buy

[Anonymous]

Wednesday, June 03, 2020
1. The financial sector shows strength as markets lift
2. Investment banking returns
3. Oil price influences forex markets

Market Moves
The S&P 500 index (SPX) rose 1.36% today while bonds, oil and gold prices all declined slightly. Financial stocks led the way as the sector closed a whopping 3.73% higher. The chart below compares State Street’s financial sector ETF (XLF) with the Utilities sector ETF (XLU), the S&P 500 index ETF (SPY), and Invesco’s Nasdaq 100 index ETF (QQQ). Over the past three weeks banking stocks have surged and outpaced other sectors as financial companies have shown signs that they will recover from the economic effects of the pandemic.

The reemergence of the financial sector is important among professional investors who don’t see a bull market as sustainable unless this sector participates. A more typical rebound from recessionary times follows a sector-rotation script where the financial stocks tend to rebound first, followed by technology stocks. That script is flipped this time around because of the unique nature of the pandemic-driven recession.

Investment Banking Returns
Financial sector stocks showed common patterns of breaking out above recent resistance and confirming upward trending price patterns. In the chart below, Goldman Sachs (GS), J.P. Morgan Chase (JPM), Citigroup (C), and Bank of America (BAC) all show similar upward trends and a breakout from something like a double-bottom price pattern (except for BAC which has yet to break out). Experienced chart watchers recognize that such patterns often represent opportunities for continued upward movement.

• Today’s gap and run in US equities took bond yields to two month highs, with the ten year yield back over 75 bps, while the furious rally in corporate credit continued apace.
• On the equity side, the move was largely a continuation of the advance since May 14th, with the bottom two deciles from that low through yesterday down today versus a nearly double-digit average gain for the 50 stocks which were up most from May 14th to yesterday.
• There are three other consistent drivers of performance we can see from the charts below.
• While margins and analyst ratings don’t do much to explain the performance of stocks versus the market today, the weight of debt in a company’s capital structure, valuation on a P/E ratio basis, and market cap are all major explanations for the rally.
• This surge in stocks has come from stocks with the most debt, the lowest P/E multiples, and the smallest market cap.
• While aggressively-valued, low-debt growth businesses like software have gotten a lot of credit for out performance, price action today was driven by stocks that look like the opposite of that profile.
• Total new orders for manufacturing industries fell 36.7% annualized in the three months ending April versus the prior three months while sales on the same basis fell 15%.
• While new orders for non-durable industries collapsed 31% on that same basis, sales were up over the period even as inventories collapsed.
• Over the last two months, petroleum and coal industry sales shaved 5.5% off total growth in sales for all manufacturing industries versus a 1.4% headwind from all other non-durable industries.
• Durable industries were catastrophically weak across new orders and sales, while inventory growth rose at a slower pace than recently but still climbed.
• As a result, durable goods inventories stood at 2.22 x sales in April versus inventories just 0.92 x sales in non-durable industries.

Investment Banking Returns
Financial sector stocks showed common patterns of breaking out above recent resistance and confirming upward trending price patterns. In the chart below, Goldman Sachs (GS), J.P. Morgan Chase (JPM), Citigroup (C), and Bank of America (BAC) all show similar upward trends and a breakout from something like a double-bottom price pattern (except for BAC which has yet to break out). Experienced chart watchers recognize that such patterns often represent opportunities for continued upward movement.

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