US Equity Sector Prediction – Financials Rise with Yields

The financial sector rose sharply in the first week of February. The SIXM financial sector index rose 6.6%, driven by gains in US yields. The yield curve steepened sharply, helping to lift interest-rate-sensitive financial shares. Historically the financial index experiences mixed results in February. Earnings in January were better than expected for financial companies that have trading and asset management operations. The technicals are positive as momentum is turning positive and prices are fast approaching a breakout level.

Financials Benefit from a Steepening Interest Rate Curve

The financial sector index, which tracks banks and brokers, rose as yields moved sharply higher. The US 10-year yield broke out, rising nearly 9-basis points this week. This rally in long-term yields helped the differential between the 10-year yield and the 2-year yield widen. The interest rate curve steepens, where long-term yields rise faster than short-term yields, banks can increase their profitability. Banks make money by lending at long-term rates via mortgages and borrow at short-term rates from each other and central banks. The term structure of the yield curve steepened to the highest level since 2017, which is very positive news for the financial sector.

Seasonality

Historically, the financials have experienced mixed results in February. Over the last 10-years, the SIXM increased 70% of the time for an average gain of 0.9% in February. During the past 5-years the SIXM has declined 60% of the time for an average loss of 1.9%.

Technical Analysis

The SIXM is forming a cup and handle continuation pattern. This is a pause that refreshes higher and provides a buy signal when the price breaks out. Target resistance on the SIXM is seen near the January highs at 389.35. Support on the index is seen near the 10-day moving average at 367.

Medium-term momentum is about to turn positive as the MACD (moving average convergence divergence) index is poised to generate a crossover buy signal. This crossover buy signal occurs as the MACD (moving average convergence divergence index) line (the 12-day moving average minus the 26-day moving average) crosses above the MACD signal line (the 9-day moving average of the MACD line). The MACD histogram is also about to slice through the zero-index level generating a crossover buy signal. The MACD histogram has an upward sloping trajectory which points to accelerating positive momentum.

Short-term momentum is also positive. The fast stochastic generated a crossover buy signal and has shot higher. The current reading on the fast stochastic is 73, fast approaching the overbought trigger level of 80. With the RSI (relative strength index) at 60, there is little concern that this market is overbought.

Summary

The SIXM financial sector index is benefiting from rising yields and a steepening yield curve. Reliable data has pushed yields higher, which allows financial companies to lend long and borrow short. The seasonal are mixed, following mixed earnings in January. The technicals are positive, and a break of the 390 level would signal a breakout and a buy signal. Look for prices to rise above resistance and continue to climb.