Macro

Financial ETF XLF Nears Breakout After 32% Gain Since October 2023 Lows

XLF ETF up 32% since October 2023, poised for breakout with key earnings reports ahead.

By Bill Bullington

7/10, 12:43 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
SPDR Select Sector Fund - Financial
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Key Takeaway

  • Financial Select SPDR fund (XLF) is nearing a potential breakout, driven by bullish patterns across daily, weekly, and quarterly charts.
  • XLF has gained 32% since October 2023 lows but underperformed in 2024 with a +10.6% return vs. S&P 500's +17%.
  • Upcoming earnings reports from major holdings could be pivotal for XLF's performance and broader market sentiment.

XLF Earnings Season in Focus

The Financial Select SPDR fund (XLF) is set to be in the spotlight over the next two weeks as some of its largest holdings report their second-quarter earnings. This period is crucial for the ETF, which comprises five industries: financial services (33%), banks (26%), capital markets (21%), insurance (16%), and consumer finance (4%). Notably, banks represent a significant 26% of the XLF, but the majority of the index is made up of non-bank financial institutions. The financial sector is the second-largest in the S&P 500, with a 12% weighting, trailing only the technology sector at 33%. Over the past year, XLF has performed well, rising 32% from its October 2023 lows. However, it has underperformed in 2024, gaining 10.6% compared to the S&P 500's 17% increase.

Technical Patterns Indicate Bullish Momentum

From a technical perspective, XLF is showing bullish formations across multiple time frames. On the daily chart, XLF was the best-performing sector ETF on Tuesday, July 9, nearing the neckline of a potential bullish inverse head & shoulders pattern. This follows a similar breakout in early May, which saw immediate upside but failed to achieve its objective. A successful breakout this time could lead to a fresh all-time high.

On the weekly chart, XLF has been flat since mid-March, forming the right shoulder of a large inverse head & shoulders pattern. A breakout here would target the $55 level, with the left shoulder encompassing movements from late 2021 through early 2022. Despite a strong comeback from last fall's low, XLF has yet to fully reclaim its 2021 highs.

Long-Term Recovery and Historical Context

The Great Financial Crisis of 2008 significantly impacted the financial sector, and many stocks have yet to fully recover. XLF peaked in May 2007 at $38.15 and is currently trading around $41.50, a net gain of 8.8% over 17 years. In contrast, the S&P 500 has gained 275% over the same period. The S&P 500 surpassed its 2007 high in 2013, while XLF reclaimed its 2007 high in 2021 but failed to hold it. The ETF has shown better performance recently but remains close to its last peak.

A successful breakout on the daily chart could trigger a larger weekly pattern breakout, creating distance from the 2007 high and prompting a multi-decade breakout. This underscores the importance of monitoring multiple time frames, regardless of one's trading strategy. The next step would be seeing solid reactions, starting this Friday.

Street Views

  • Frank Cappelleri, Founder of CappThesis (Bullish on XLF):

    "From a technical perspective, XLF is sporting bullish formations across three different time frames... A successful daily pattern breakout also would help the much bigger weekly pattern break out, which would finally create distance from the 2007 high and prompt a multi-decade breakout."