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Banks hold the key to the next leg of the rally

Talking Numbers

Banks hold the key to the next leg of the rally

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Banks hold the key to the next leg of the rally

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These three charts spell trouble for the bulls

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These three charts spell trouble for the bulls

It's make or break time for the financials this week.

JPMorgan Chase and Wells Fargo will kick off earnings season when they release their recent quarter results.

The financials have been slightly underperforming the overall market over the past week, with the market benchmark S&P 500 down 1.5 percent while the index's financial sector is lower by 2.2 percent. With the financials comprising the largest sector, their health could play a key role in preserving the rally.

CNBC contributor Gina Sanchez, founder of Chantico Global, is hesitant when it comes to investing in the financials based on their fundamentals.

"A lot of how banks have made their money has been on fee income," said Sanchez. "What banks still don't have is a whole lot of net interest margin. So, banks are still waiting around for higher rates."
Where rates go is anyone's guess, but Sanchez thinks that outlook for banks "is very much a question mark."

(Watch: Fed gives banks extension on piece of Volcker Rule)

"It's really hard to look forward and be really excited about banks, particularly after the huge runup that we've seen," said Sanchez. "There are a couple of bank names that are interesting like Wells Fargo. But, generally speaking, I would say that you really need to watch this sector."

With financials up nearly 41 percent in the last two years, Sanchez doesn't believe there is much more room on the upside. "Most of the folks who made money on [financials] have made their money at this point," she said.

Talking Numbers contributor Richard Ross, global technical strategist at Auerbach Grayson, is also skeptical of the financial sector. Looking at the ETF tracking the S&P's financial sector, the XLF, Ross sees the makeup of the ETF as a weakness and a reason to sell.

"I'm very concerned here," said Ross. "It’s not just by the chart of the XLF itself but really by the constitution of this rally."

Ross notes that a large portion of the XLF is comprised of banks and brokers. However, slightly more than 31 percent of the ETF consists of four stocks: Berkshire Hathaway, JPMorgan Chase, Wells Fargo, and Bank of America.

"Investors once again are flocking to those big banks for that perceived security," said Ross. "You've got Warren Buffett in two of those names, Jamie Dimon in another. This advance is getting very narrow."

(Read: The Oracle of Omaha, lately looking a bit ordinary)

On the other hand, the XLF also has market-sensitive stocks like Goldman Sachs, Morgan Stanley and Citigroup, all of which Ross points out are down on a year-to-date basis.

"That's telling me the market environment for risk could be in trouble," said Ross.

Ross sees the chart of the XLF as reflecting his concerns, with a bearish triple top forming over the past several weeks with a neckline roughly at around $21.65. He believes the XLF will break below that and test its 200-day moving average, currently near $20.70.

"That's going to be the real test," said Ross. "I think we could see the first break below that 200-day going back almost two years at this point."

"Financials are another sector that I think is giving you a market tell and I think you want to be a seller," Ross said. "In fact, I know you want to be a seller."

To see the full discussion on what's next for the financial sector, with Sanchez on the fundamentals and Ross on the technicals, see the video above.

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