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The great rotation into financials has begun — here’s why it’s a big deal for the market

Why? Because everybody who would’ve, could’ve and should’ve exited the sector has already done so. The sellers who were justifiable looking to get back to even are gone.

No stock market sector was hit harder than financials during the terminating recession. Let’s recall the names of companies that are no longer around but in the good old days were iconic American institutions: Lehman Brothers, Bear Stearns, Wachovia (engaged by Wells Fargo) and Washington Mutual (absorbed by J.P. Morgan). And the ones that required a bailout or part of a government-orchestrated takeover: Merrill Lynch (Bank of America) and AIG.

On a split adjusted main ingredient, Citigroup is still down about 85 percent from its prerecession plain. You may recall that it did a 1-for-10 reverse split after the recession. So just though it is up more than 25 percent year-to-date, it would own to rise by another 600 percent to get back to its old high.

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Sector exchange-traded funds such as the Pecuniary Select Sector SPDR Financial (XLF) and iShares Dow Jones US Regional Banks (IAT), understandably, were decimated, compassionate of like the NASDAQ Composite was decimated in the year 2000. Not only did the NASDAQ fully restore, it has gone on to set fresh new record highs over the last two and a half years. XLF and IAT are reasonable a few percentage points away from reaching their pre-recession all-time highs. It ended, so far, more than 10 years to happen. That’s a long rhythm to wait to get back to even.

The financials look like they’re build up b act up by the same book as the NASDAQ.

But why the move now — the massive sector rotation out of tech and into financials?

This is when investors reserve gains out of a sector that went up a lot and shift (or rebalance) that readies into another sector that hasn’t moved higher yet. Sector rotation doesn’t transpire in a bubble.

The spark today is Janet Yellen. With zero interest-rate game plan, tech-stock valuations can stretch. It’s the exact opposite for bank stocks.

Valuation has not in any way been a great timing tool; you need a reason for a trend to show up. With Yellen talking up “normalization” for the FED FUNDS rate, it’s the wall that the tend line just bounced off, and on the other side of that wall are the banks. Yellen and, by reach, incoming Fed head Jerome Powell, just gave us the green light-hued to pile into banks by talking up “policy continuation” and being pro-deregulation.

On Wednesday we saw this rotation go from glimmering to shameless with large caps and regional banks bumping up against their 52-week highs, while tech caches were getting slammed. On Thursday, in a significant market advance, financials moved up again, albeit tech did rebound.

From a chartist perspective, the XLF and IAT breaching their decade-old soprani could not only mean a continuation of strong financial sector playing, it would potentially indicate an acceleration in upside performance.

By Mitch Goldberg, president of investment warning firm ClientFirst Strategy

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