Financial Sector May Rally 11% – 15% Higher Before End Of January 2022

The US Federal Reserve is keeping interest rates low. At the same time, the US consumer continues to drive home purchases and holiday shopping. Strong economic data should drive Q4 results for the financial sector close to levels we saw in Q3:2021. If that happens, we may see a robust rally in the US Financial sector over the next 45 to 60+ days.

The strength of the recent rally in the US major indexes shows just how powerful the bullish trend bias is right now. Some traders focus on the downside risks associated with the US Federal Reserve actions and/or the concerns related to inflation and global markets. I, however, continue to focus on the strength in the US major indexes and various sector trends that show real opportunities for profits.

Comparing Sector Strength

The following two US market sector charts highlight the performance over the last 12 vs. 24 months. I want readers to pay attention to how flat the Financial Sector has stayed since just before the 2020 COVID event and how the Financial Sector has started to trend higher over the past 12 months. This is because the shock of COVID briefly disrupted consumer activity. Yet, consumers are coming back strong, driving retail sales, home sales, and the continued strong US economic data. Therefore, it makes sense that the Financial sector should continue to show firm revenue and earnings growth while the US consumer is active and spending.

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Over the past two years, Discretionary, Technology, and Materials drove market growth compared to other sectors. Remember, the initial COVID virus event disrupted market sector trends over the last 24+ months.

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(Source: StockChart.com)

Taking a look at this 1 Year US Market Sector chart shows how various sectors have rebounded and how the Discretionary and Materials sectors have flattened/weakened.

Pay attention to how the Energy and Real Estate sectors have been over the past 12 months. Also, pay attention to how the Financial sector is strengthening.

I believe that the continued deflation/deleveraging that is taking place throughout most of the world will continue to drive global central banks to stay relatively neutral regarding rising interest rates. This will likely prompt an easy money policy throughout most of 2022 and drive continued revenues/earnings for sectors associated with consumers’ engagement with the economy.

If inflation weakens into 2022 while wage and jobs data stays strong, we may see more moderate strength in the Financial, Healthcare, Discretionary, and Technology sectors over the next 6 to 12+ months.

Read more about Global Deleveraging Here: Delivering Covid Bubble Possible Volatility Risks In Foreign Markets

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(Source: StockChart.com)

Financials May Pop 11% Or More Over The Next 6+ Months

This Weekly IYG, IShares US Financial Service ETF, highlights the recent sideways price trend in the Financial sector and the potential for a 9% to 13% rally that may take place as the markets shift into focus for the Q4:2021 earnings. Yes, inflation is still a concern, but as long as the US consumer continues spending and engaging in the economy, the Financial Services and US Banks should show strong returns.

If the US markets rally into the end of 2021, possibly reaching new all-time highs again, this trend may carry well into 2022 and drive Q4:2021 and Q1:2022 revenues and earnings for the Financial sector even higher.

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This Weekly XLF chart shows a very similar setup to IYG. I firmly believe the recent fear in the markets related to the US Federal Reserve, the new COVID variants, and the global markets deleveraging process is missing one critical component – the strength of the US markets and the strength of the US Dollar.

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As the rest of the world struggles to find support and economic strength, the US markets continue to rebound on the strength of the US consumer, the recovering economy, and the growth of these sectors. As long as the US Federal Reserve does not disrupt this trend, I believe Q1:2022 could be much more robust than many people consider. I also think the deflation/deleveraging process will work to take the pressures away from recent inflation trends.

What could this mean for 2022?

Early 2022 may well work as a “rebalancing” process for the global markets – possibly taking the pressures away from the strength in energy, commodities, and staple products/materials. This means pricing pressures will decrease while consumers are still earning and spending. The Financial sector should benefit from these trends over the next 6+ months.

Watch for the Financials to start to increase throughout the end of 2021 and into early 2022. There are many ways to consider trading this move, but ideally, I think the rally will take place before the end of February 2022.

Q1 is usually relatively strong, so that this trend may last well into April/May 2022. It all depends on what happens that could disrupt the current market sector trends. If nothing happens to disrupt the strength of the US Dollar and the strength of the US markets, then I believe the Financial Sector has a very strong opportunity for at least 10% to 11% growth.

Want to learn more about the potential for a financial sector rally?

Learn how I use specific tools to help me understand price cycles, set-ups, and price target levels. Over the next 12 to 24+ months, I expect very large price swings in the US stock market and other asset classes across the globe. I believe the markets are starting to transition away from the continued central bank support rally phase and may start a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern start to drive traders/investors into Metals.

If you need technically proven trading and investing strategies using ETFs to profit during market rallies and to avoid/profit from market declines, be sure to join me at TEP – Total ETF Portfolio.

Have a great day!

Chris Vermeulen
Chief Market Strategist

 

The iShares U.S. Basic Materials ETF is Heading for $150

The iShares U.S. Basic Materials ETF is up by more than 25% since the start of the year and could be set to break past the $150 psychological point before the end of the year.

IYM Continues to Rally

The iShares U.S. Basic Materials ETF (IYM) is a fund designed to provide investors with broad exposure to the Materials – Broad segment of the stock market. It is a passively managed exchange-traded fund that has been around since 2000.

IYM is sponsored by Blackrock, one of the leading asset managers in the world. The ETF has over $890 million in assets under management, making it one of the average-sized funds seeking to match the performance of the Materials – Broad segment of the stock market. The fund wants to match the performance of the Dow Jones U.S. Basic Materials Index before fees and expenses.

Meanwhile, the Dow Jones U.S. Basic Materials Index basically measures the performance of the basic materials sector of the U.S. stock market. IYM has perhaps the heavies allocation in the basic materials sector, about 100% of its portfolio is comprised of stocks in that area.

Some of its biggest holdings include Linde Plc. (LIN), which accounts for about 18.35% of total assets. The next ones are Air Products And Chemicals Inc. (APD) and Freeport Mcmoran Inc. (FCX).

IYM ETF chart. Source: FXEMPIRE

IYM Could Touch $150 Soon

IYM has been one of the top-performing funds in funds in the basic materials sector. It has rallied by more than 25% since the start of 2021, while its 52-week performance stands at 33.25%. At press time, IYM is trading at $140.89 per share. Over the past year, the ETF has traded between $104.99 and $141.25.

IYM could rally towards the $150 mark over the coming weeks if it maintains the current momentum. The latest infrastructure bill in the United States is expected to make a massive impact in the materials sector, and this could positively affect IYM’s performance in the coming weeks and months.