Canadian Banks No Longer Leading US Banks. Trouble Ahead For The Canadian Economy?

The Canadian banks (XFN) have outperformed their US counterparts (XLF) since 2009.  They have been placed on a global pedestal due to their reluctance to participate in the subprime mortgage debt and collateralized debt obligations that precipitated the Great Recession.  Their balance sheets remained extremely healthy and their stock prices reflected this to this day.  But that was then...

Two of the 4 wheels have blown on the car that is the Canadian economy.  Precious metals and material stocks are down some 70% since 2011.  Now stocks of energy producing companies are free falling in tandem with the price of oil which seems to be in global abundance despite the fact that the opposite view held the public consensus only 6 years ago.  Don't get me started on the Canadian housing market.

Banks and financial sectors reflect the overall health of a country's economy.  Their relative performance is predictive of the relative performance of a given country's economy.  The chart above would suggest that growth in the US economy will continue to outpace that of the Canadian economy.  If the Canadian bank index is unable to post new 52-week highs and/or trends lower trouble is ahead.

The Way Forward For US Banks And The US Financial Sector

The XLF is the largest US investment bank ETF.  It's surprising that Berkshire Hathaway (BRK) is its largest holding along with WFC, JMP, C and BAC.  BRK and WFC have been the best performing in the sector by far (BRK owns a large percentage of WFC).

From a technical perspective, the easy money has been made as it has run into significant overhead resistance that was established in the decade prior to the financial crisis.  I think XLF is an excellent long term hold, however, choppy and sideways trading is likely the way forward.

There is still opportunity for upside in more speculative financial issues such as RF, KEY, STI and AIG.  Their long term charts illustrate the tremendous destructive force of the financial crisis, erasing in some cases equity built up over decades.  I generally use call options with issues as speculative as these.

The US financial sector now sits where the DOW did in the 1930s after the 1929 crash.  The waters may still be somewhat rough, but I think it's mostly upside from here.

QQQ Continues To Lag S&P 500. PerfChart QQQ SPY EEM XLF IWM MDY FDN IBB XIU

Mega cap tech stocks (QQQ) have been lagging the S&P 500 for most of the year, largely due to the poor performance of a few big names (i.e. AAPL, MSFT, INTC).  Biotechnology (IBB), on the other hand, is way out front.

Canadian vs. US Financials

The distance between key technical support and resistance levels post financial crisis is and should be more notable in the financial sector than any other sector. In March 2009, it really looked like the Financial Select Sector SPDR (XLF), which more or less tracks the US financial services sector, was going to zero. It bottomed at $5.73 in March 2009 and currently stands at $13.44. It is currently trading in a downward fashion toward support at ~$12-12.50. If this support level breaks significantly, there really is no other significant technical support in between it and the bottom.

The iShares CSN S&P TSX Capped Financials Index (XFN.TO), which more or less tracks the Canadian financial services sector, appears to be in much better shape than its US counterpart but has the same support gap problem. Support exists around ~$19-20, but below that who knows? One would have to look back to 2004 to see a small trading range where some support may exist around $17.

I think both of these charts are going to be restricted to large trading ranges for months. The XLF faces tremendous resistance at $20 and will only break through it when a strong recovery is underway.