Is it Time to Take Profits in Financial Stocks?

Key Points

• The XLF ETF has demonstrated strong momentum, up 8.48% YTD and nearly 32% over the previous year.
• The sector ETF has approached significant resistance around $42 after a notable turnaround since October last year.
• Top holdings like Berkshire Hathaway, JPMorgan Chase and Visa exhibit impressive performance, potentially influencing the sector outlook.

The financial sector and the popular sector ETF Financial Select Sector Fund NYSE: XLF continue to demonstrate impressive momentum as we progress into 2024. Much like its stellar performance in the latter part of 2023, the XLF has maintained its upward trajectory, showcasing remarkable resilience and growth.

Year-to-date, the XLF ETF has surged by an impressive 8.48%, marking a substantial increase of nearly 32% over the previous year. This robust performance stands out compared to the broader market, which has seen an uptick of 7.26% over the same period.

Since its low point in October, the XLF has embarked on an impressive turnaround, establishing a formidable uptrend that has persisted into the new year. Currently, the ETF hovers near a significant area of resistance and potential supply, approaching its highs from 2021 around the $42 mark.

As the XLF faces this critical juncture after its remarkable six-month ascent, could it be time to consider locking in gains?

When answering that question, one crucial aspect to consider is analyzing the performance of some of the sector's key players.

The Sector ETF and its Key Players

The financial ETF provides exposure to significant players in the U.S. financials segment. It focuses on large banks through a cap-weighted, S&P 500-only portfolio and avoids small-cap companies. 

While the ETF might appear overbought from a technical analysis perspective, it has yet to enter overbought territory according to its Relative Strength Index (RSI). Its RSI is 66.08, which signals that while it may be on its way to overbought territory, it cannot be classified as overbought on that metric alone. 

Still, its one-year performance and recent outperformance of the market, coupled with the fact that it trades near a significant supply area and possible resistance, could make the sector prone to a pullback. 

Consider and closely follow the ETF's most heavily weighted holdings, as they will greatly impact and influence the sector ETF's performance. Let's look at where the ETF's top holdings trade and what that could mean for the sector. 

Berkshire Hathaway Inc.

Warren Buffett's Berkshire Hathaway Inc. NYSE: BRK.B is the sector ETF's top holding, with an impressive 13.04% weighting. Not only has BRK.B outperformed the overall market and vastly outperformed the sector, it's up 14.43% year-to-date and almost 40% over the previous year. 

With a P/E of 9.22, maintaining a firm uptrend and position above rising SMAs, and projected earnings growth of 15.30%, the company's position bodes well for the overall sector. In the near term, $400 has now developed as a potential support zone. Therefore, the chances of a pullback across the broader sector might increase if the stock begins to hold below this level.

JPMorgan Chase & Co.

JPMorgan Chase & Co. NYSE: JPM is the ETF’s second-largest holding, weighing 9.46%. 

Like the largest holding, BRK.B, JPMorgan has also outperformed the sector and broader market. The stock is up 11.88% year-to-date and a staggering 51% over the previous year. Although trading near all-time highs, within an increasingly vertical uptrend, the stock still maintains an attractive valuation, with a P/E of 11.73. 

With the support of the uptrend near current prices, at $185, the stock might be close to a pullback and consolidation. Considering its performance in a higher timeframe, investors might welcome a pullback and opportunity for price stabilization and re-entry, given its relative strength and outperformance. 

Visa Inc.

Visa Inc. NYSE: V is the ETF's third-largest holding. The stock has an 8% weight in the ETF, and its performance since the start of the year has primarily been in line with the sector's. 

From a technical analysis perspective, V shares are trading close to its uptrend's support, making the stock susceptible to a pullback should the price break below $280. While the stock has 12.02% projected earnings growth, its current P/E of 32.57 is vastly higher than its counterparts.