Financial Sector: Potential Trend Change Looms with Double Top

Key Points

• The financial sector, previously up over 11% YTD, faces a critical juncture with a recent 2% pullback suggesting a potential double top and trend change.
• XLF is near key support levels, with the 20- and 50-day SMAs converging. A break below $41, despite a near 10% YTD gain, could confirm a trend shift.
• Key holdings—Berkshire Hathaway, JPMorgan Chase, and Visa—are crucial to watch. Berkshire and JPM are strong YTD, while Visa's recent consolidation hints at a potential downside if support fails.

Previously an outperformer with a year-to-date gain of over 11%, the financial sector now finds itself at a critical juncture after giving back some of its gains. Just six trading days ago, the Financial Select Sector SPDR ETF NYSE: XLF made a new high but has since pulled back over 2%. From a technical analysis perspective, this recent action suggests the makings of a double top. This classic bearish pattern could signal a significant trend change and potential downside for the sector.

Currently trading near its uptrend support and at the critical juncture where the 20- and 50-day Simple Moving Averages (SMA) converge, the XLF is poised for a decisive move. If the ETF breaks below the key support zone at $41, it could confirm the trend shift and signal further downside. Despite this precarious position, the sector remains up nearly 10% year-to-date and boasts a remarkable 30% gain over the past year. To better understand the sector's future direction, examining its top holdings and their current standings is crucial.

Top Holdings in the Financial Sector ETF

The financial ETF provides exposure to significant players in the US financials segment, focusing on large banks through a cap-weighted, S&P 500-only portfolio while avoiding small-cap companies. Here’s a closer look at the ETF’s top three holdings:

Berkshire Hathaway Inc.

Berkshire Hathaway (NYSE: BRK.A, BRK.B), the ETF’s largest holding with a 12.99% weighting, has demonstrated robust performance, up over 14% year-to-date. The company (BRK.A) recently announced an impressive earnings beat, with quarterly earnings of $7,796.46 per share and revenue of $89.87 billion, reflecting its continued strength. Despite this, BRK.B has struggled to reclaim resistance at $420, consolidating instead above its rising 200-day SMA. In the near term, $400 will act as critical support. A break below this level could signal a potential downside for the stock and, by extension, the sector.

JPMorgan Chase & Co.

JPMorgan Chase NYSE: JPM, the ETF’s second-largest holding, has also been an impressive mover, with its stock up 18% year-to-date. The company boasts an attractive P/E of 12.12 and a dividend yield of 2.29%, with analysts maintaining a moderate buy rating based on 13 ratings. From a technical analysis standpoint, JPM continues to make higher lows within its uptrend. The stock is well above its uptrend support of $190, and a bearish technical pattern would only take hold if it were to break below this key zone, which seems unlikely in the short term.

Visa Inc.

Visa NYSE: V, the ETF’s third-largest holding with a 7.59% weighting, has underperformed relative to its peers, with the stock up just 5.4% year-to-date. Visa's P/E is more expensive at 31.17. The company recently reported strong earnings, with $2.51 EPS for the quarter, beating the consensus estimate by $0.08, and quarterly revenue of $8.78 billion, up 9.9% year-over-year. Despite these positive results, Visa recently made a lower high and is consolidating in the mid to low range of its consolidation on a higher timeframe. A break below its most recent higher low near $270 could signal a trend change and potential downside for the stock.

The Bottom Line

The financial sector stands at a potential inflection point, with the XLF displaying the makings of a double-top formation and trading near critical support levels. The recent pullback and tightening price action suggest a significant move may be imminent. 

If the ETF breaks below the $41 critical support zone, it could confirm the trend shift and signal further downside. Investors should closely monitor the sector's top holdings—Berkshire Hathaway, JPMorgan Chase, and Visa—as their performance and technical patterns will likely play a pivotal role in determining the sector's overall direction in the coming weeks. Navigating these uncertain waters requires a careful and informed approach, balancing the sector's impressive year-to-date gains against the looming technical risks.