Financial Stocks Are Helping the S&P 500 Keep Flexing

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Welcome to July, which - contrary to popular wisdom - actually has a good track record for the U.S. stock market. I ran the numbers over the past 30 years, and July has seen about a 1% rise for the S&P 500 on average. While that statistic alone certainly does not guarantee a positive return for the S&P 500 again this July, the sector and group rotation within the S&P 500 continues to work well and barring any sudden shift in wind looks to still provide U.S. stocks with further upside.

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Coming into last week, I warned my Clubhouse subscribers and mentoring clients that a less-is-more approach for the week is likely warranted for the month, quarter and half-year end, for 2017 could see choppy going for the broader stock market as portfolio managers reshuffle and window-dress their portfolios.

Last Monday June 26 in my opening missive to the week in this column, I offered that the sector and group rotation game was at the core of the current stock market and that transportation stocks as represented by the iShares Dow Jones Transport. Avg. (ETF) (NYSEARCA: IYT ) could see a breakout.

Sure enough, by week's end the IYT ETF had rallied well more than 1% for the week, and thus not only completed a breakout on its chart in absolute terms but clearly also staged relative strength versus the broader U.S. stock market.

The S&P 500, for its part, last week dropped roughly 0.5%, much of it as a result of the continued underperformance of large-cap technology stocks as represented by the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ: QQQ ). The question at this point is how soon the bleeding in large cap technology stocks can slow and how much of the slack can be picked up by other parts of the market, such as the aforementioned transportation stocks, financials, small caps and healthcare.

For the time being, because of this continued sector rotation I still foresee the S&P 500 reaching toward the 2,500 area in coming weeks, but a break below the 2,400 mark would be an initial sign of concern.

As a side note, while technical analysis certainly has its place, over the past nearly 20 years as a trader I have found that if used without perspective on the market, it can be a challenging way of analyzing the market. At present, for example, plenty of 'chartists' are pointing to an exhaustive character in the S&P 500 as it relates to waning upside momentum. In my eye, however, that analysis ignores the aforementioned and continuing underlying sector rotation, which thus far has held up the market in recent weeks.

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Besides a breakout in transportation stocks, last week we got further notice that four of the world's largest five central banks are now whistling a hawkish tune. This, combined with the passing of the bank stress test in the United States led to a notable lift in financial stocks. The financial sector, as represented by the Financial Select Sector SPDR Fund (NYSEARCA: XLF ), as a result broke higher. On the following weekly chart, that the breakout not only occured in absolute terms but also in relative terms shows the financial sector has good strength versus the S&P 500 (bottom part of the chart).

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Given that the small-capitalization stocks, as represented by the iShares Russell 2000 Index (ETF) (NYSEARCA: IWM ), contain a good many financial stocks, it was also no great surprise to see small-caps outperform large-cap stocks. Thus, this theme is what I will be watching closely this week.

From a pure technical perspective, many banking stocks displayed a well-defined bearish head-and-shoulders top pattern until early June. With last week's bullish reversal in the XLF ETF, these formerly bearish patterns have broken and thus negated. This type of bearish to bullish reversal move tends to be positive.

In conclusion, considering that financials are a key part of the U.S. stock market, their recent flip to the bullish side, which supports the underlying sector rotation game, could be just what the doctor ordered to get both large and smaller capitalization stocks to break higher and the S&P 500 toward the 2,500 area.

Check out Serge's Trade of the Day for July 3.

Today's Trading Landscape

To see a list of the companies reporting earnings today, click here .

For a list of this week's economic reports due out, click here .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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