A Very Bullish Signal is Firing in the Financials Sector BY LUCAS DOWNEY, CONTRIBUTING EDITOR, TRADESMITH DAILY Interest-rate hikes are a thing of the distant past. Now that a year’s past since the final rate hike hit in July 2023 and we’re gearing up for rate cuts, it’s time to focus on the future. Back in November, we signaled how financial stocks tend to serve up big gains once the Federal Reserve is done lifting rates. That call didn’t disappoint. The Financials Select Sector SPDR Fund (XLF) gained 22% a year after the final hike on July 26, 2023. Not bad! But that was then. What about now? Given the Financials sector is one of the top-performing groups year-to-date, you may feel inclined to take profits. However, one rare momentum signal suggests you should keep betting on the sector into year-end. But before we get to that signal study, let’s first take stock of the current sector landscape, where market leadership is changing quickly. Move Over Tech Stocks; Say Hello to Utilities and Financials At TradeSmith, we’ve been very vocal about the huge equalizer trade that’s hit stocks recently: Left-for-dead small-caps were underperforming a handful of mega-cap behemoths, but that all drastically changed once the Consumer Price Index (CPI) report for June effectively cemented the case for the Fed to finally start easing interest-rate policy. Since then, there’s been a huge reshuffling of sector performance. In a wild shift, Real Estate stocks have seen relentless upside momentum. And it’s not just REITs that have been thriving recently. Financials stocks, surging 18% in 2024, have now overtaken Technology and Communications Services in YTD gains. In fact, Financials are second only to Utilities, as you’ll see in this list of the S&P 500 YTD sector returns as of mid-morning Friday, Sept. 6: 
Given the super-strong gains in banks and insurers this year, I decided to look back to find if there’s a powerful signal about what potentially lies ahead. Turns out, there is! Let’s dive in. When Financials Stocks Rip Through August, It Forecasts More Gains Ahead Stocks have had a blistering start this year. Not only did the S&P 500 jump 19.53% from January through August, the Financials Select Sector SPDR Fund (XLF) jumped 22% through the first eight months of the year: 
That’s the second-best start for XLF going back to 1999. Only 2021 saw larger returns. Now let me show you why fading this momentum is likely a bad idea. When you review all January – August periods since 1999, you learn a few things in 25 years of data. - The average gain in all periods stood at a measly 2.4%.
- Double-digit lifts (10% or larger) through August, like in 2024, have only occurred seven times prior.
- Most importantly, in the average year, XLF gained 4.5% in the final four months of the year…
- However, when January – August posted 10% gains, September – December saw average gains of 9.1%, instead.
This historical datapoint highlights the power in being scientific in your investing approach. Just as we learned in science class, Newton’s First Law of Motion states that objects in motion tend to stay in motion… and it turns out that power law exists in markets, too. Don’t give up on market-leading stocks and sectors just because they go up a lot. Study history. Find the proof. At TradeSmith, we’re all about finding alpha through evidence-rich analysis. In Quantum Edge Pro, for example, my business partner Jason Bodner provides a weekly hotlist of the Top 10 and Bottom 5 stocks according to his Quantum Edge system (as well as a model portfolio). Those scores are based on the best predictive fundamental factors as well as technical factors – especially “big money” interest from Wall Street institutions. And subscribers can check the Quantum Score for any of their stocks right on their TradeSmith Finance dashboard as well. I continue to favor financial stocks into year-end, and financials and insurance companies have certainly appeared prominently in Jason’s Top 10 lately, too. One way to play this theme is by owning a basket of financial names, like the XLF ETF. But if you’re like me and want to play for something bigger, get started with Quantum Edge to find the top-ranked financial stocks thriving in today’s uncertain market. Regards, Lucas Downey
Contributing Editor, TradeSmith Daily | 
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