BUY THE BREAKOUT IN XLF?

While there’s no guarantee this is the end of the selloff in the markets, we have seen a nice turnaround in the Nasdaq starting this morning. After a sharp drop at the open, the Nasdaq index hit an intraday low of 12517, marking just shy of a 10% drop from its intraday all-time high of 13879 on Feb. 16.

If indeed this is the end of the selloff and the markets are turning around, what kind of discounts are we looking at in the most popular names? I’m going off the Robinhood 100 Most Popular stocks and how far below their 52 week highs they are:

  1. Palantir (PLTR): 52wk high: 45.00, current price 23.91. Decline: 48%.
  2. Apple (AAPL): 52wk high: 145.09, current price 119.86. Decline: 17.7%.
  3. Tesla (TSLA): 52wk high: 900.40, current price 610. Decline: 32%.
  4. AMC Entertainment (AMC): 52wk high: 20.36, current price 8.06. Decline: 61.7%.
  5. Sundial Growers (SNDL): 52wk high: 3.96, current price 1.21. Decline: 70%.
  6. NIO (NIO): 52wk high: 66.99, current price 38.82. Decline: 42%.
  7. Ford (F): 52wk high: 12.80, current price 12.25. Decline: 4%
  8. General Electric (GE): 52wk high: 14.13, current price 13.71. Decline: none, as it hit its 52 week high today.
  9. Microsoft (MSFT): 52wk high: 246.13, current price 231.35. Decline: 6%.
  10. Disney (DIS): 52wk high: 200.60, current price 190.16. Decline: 5.4%
  11. Gamestop (GME): 52wk high: 483.00, current price 119.91. Decline: 77%.
  12. Amazon (AMZN): 52wk high: 3552.25, current price 2978.00. Decline: 15.8%.

It shouldn’t be a surprise that the biggest decliners right now are the meme stocks like GME, AMC and SNDL. But that doesn’t mean they’re the biggest discounts.

What’s interesting is that while everyone is focused on the tech selloff, other sectors have not only been weathering the storm but thriving over the past few weeks. Throughout all of this, the Dow is currently only down about 2% from ATHs. The S&P is only down about 3% from ATHs and at its lowest point during the past few weeks, it was only a decline of 4% in the S&P. This has really been a tech-centric selloff.

Look at the Boomer Stocks Ford and GE: GE hit its 52wk high today, and Ford hit its 52wk high within the past week. This has been a classic sector rotation.

Take a look at XLF, the financials sector:

It has broken out to new all-time highs, surpassing the May 2007 peak.

There was a failed breakout in early 2018, then another in early 2020, but now in early 2021 we have seen what appears to be a definitive breakout above May 2007 highs.

So is it time to jump in to financials? It could be a smart play with rates on the rise. But here’s the problem: the smart money already moved into financials back in early November. XLF is already up 38% since early November 2020. Once the smart money saw the 10 year yield break out over its resistance level, they flooded into financials:

We saw a false breakout in the 10 year in June, but it managed to break out for real in November, and that’s when they all moved to financials.

In my view, it’s not a good idea to get in to financials right now. XLF’s weekly RSI is over 71 right now, indicating it’s in overheated territory.

Granted, XLF has seemingly shown a few separate instances where there was upside to be had even after weekly RSI reached seemingly overbought territory. Let’s take a closer look at the chart.

In early March 2004, XLF hit a price of $24.80 after a year-long 58% rally from the March 2003 market bottom. XLF weekly RSI was at 81. It dipped a bit then traded sideways for about a year and a half before breaking out in October 2005. RSI flashed the sell signal in early November 2005 after the rally, hitting 73. XLF then traded sideways until about August 2006. After that, the rally to new highs in February 2007 flashed the final sell signal. It dropped, but tried to rally in May, yet failed to break out to new highs. May 2007 was your last chance to get out, as after failing to make new highs, XLF would fall over 84% over the next year and a half.

XLF RSI peak & subsequent returns:

  • March 1, 2004: RSI, 80.7. Time til breakout: 616 days.
  • Nov. 21, 2005: RSI, 73.4. Time til breakout: 238 days.
  • Feb 12, 2007: RSI, 70.6. Time til breakout: 5,138 days.

For this next part, we’re not going to consider a “breakout” to mean all-time highs, because obviously XLF made no new all-time highs between May 2007 and Feb. 2020. But weekly RSI did hit overbought territory between then. We’re just going to look and see how long it would have taken you to make positive gains had you bought XLF when RSI was in overbought territory.

  • April 19, 2010: RSI, 69.4. Time til breakout: 994 days.
  • Jan. 28, 2013: RSI, 70.5. Actually, this turned out to be a phenomenal time to buy XLF. It was at 14.26 and to date (so 8+ years) it has never been below that, even though had you bought on that date and even at an RSI of 70.5, you would have made 136%. Heeding the RSI sell signal would have been a dumb move.
  • On Nov. 7, 2016, XLF RSI hit 71.6. It then went on to rally 40% by Jan. 2018.
  • Now, had you bought the RSI peak in late January 2018, you would have basically seen zero gains until late 2019, but then as we all know, that was a false breakout and everything got killed during the Covid crash. Had you bought XLF in late January 2018, you would have been trading sideways (with some major drops in between) until November 2020.
  • XLF RSI also broke the 70 mark in January 2020, and we all know how that turned out.

So what’s the ultimate takeaway here with XLF? Is it safe to buy now? Well you could look at it as a breakout to new all-time highs and thus a new bull market beginning. That’s possible, but it has also rallied over 600% since the March 2009 bottom.

It’s not like this thing is on sale or a “value play.” It’s a “value play” only relative to tech. But when the whole market is overvalued, relative value from sector to sector doesn’t really mean much. In my view, when the whole market is this richly valued, sector rotation is like moving to the back of an airplane that is nosediving towards the ground. You’re going to get killed just a little bit later than the people in the front of the plane.

This is XLF on the monthly RSI chart. I have marked with a horizontal line on the RSI chart the current level dating all the way back to the late 1990s. All the vertical lines show dates where XLF’s RSI was at the level it’s at today:

Other than March 2013, there really hasn’t been a lot of further upside in XLF after RSI hit the level we see it at today.

I just don’t see a ton of upside in XLF. Maybe some, of course: it’s entirely possible you could see gains of 30-40% from current levels. But I don’t think the reward outweighs the possible risk.

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