S&P 500 financial stocks are off to a bad start on Tuesday, March 17, forming the first Death Cross since October 2023.
What that means is that the stocks’ short-term moving average (MA) has crossed below its long-term trend line, which signals weakening momentum and growing downside risk.
While Death Crosses are often viewed as confirmation of an already weakening trend and not a precise timing tool, past instances highlight their potential significance.
As mentioned, the last time this pattern appeared was in November 2023, when financials were emerging from a prolonged downturn that began in 2022 amid aggressive Federal Reserve rate hikes that were meant to combat inflation. What followed was the 2023 banking sector stress tied to regional bank failures.
Another comparable setup, when the 50-day average had remained above the 200-day for over a year, occurred in April 2022. Subsequently, the sector plummeted 18% before bottoming roughly six months later.
Are financial stocks underperforming?
Financial stocks have been significantly underperforming compared to the broader market, with relative strength versus the S&P 500 dropping to levels last seen during the COVID-era recovery in late 2020. The weakness thus suggests that the struggles extend well beyond recent volatility.
Naturally, the situation is raising concerns that the economic cycle may be shifting. Currently, the most obvious points of pressure are likely exposure to private credit markets and the potential macro impact of rising oil prices.
Moreover, Global Sachs research has also shown that hedge funds have started selling more across banks, insurers, fintech firms, and trading companies in the week through March 13, as first reported by Reuters.
The report said hedge funds “aggressively shorted” financial stocks last week, with the sector seeing net selling across international markets. Market performance, of course, reflects the pressure. However, analysts also believe that rising short interest in financial stocks may reflect broader hedging activity rather than outright bearishness on banks themselves.
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