Wells Fargo (WFC) – WFC – August 9, 2021

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Market Outlook:

SPY and QQQ both managed to reach new all-time highs last week after a few days of consolidation. The RSP equal-weighted index also provided optimism for equities as it moved to new all-time highs breaking above a multi-month consolidation range. This indicates a healthier market rally with multiple sectors being involved in pulling SPY higher. Sector rotation shows an uptick in momentum for Financials and Materials as rates seem to be back in play and a $1 trillion infrastructure package is currently being discussed. Precious metals declined heavily last week with both GLD and SLV ETF’s posting a weekly decline of 3.05% and 4.70% respectively with GLD looking likely to revisit March lows at $157.

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WFC Bullish Trade Idea:
Our bullish trade is Wells Fargo & Co (WFC). WFC has broken out of its 2-month range between $42 and $47 and has outperformed XLF on a relative basis. With price still trading below pre-pandemic levels, there is significant upside for WFC at its current level. From a fundamental perspective, WFC recently increased dividends and will likely get balance sheet restrictions lifted which should help propel it back to its pre-pandemic levels. View WFC Trade

Sector Outlook

The Relative Rotation Graph (RRG) for sector rotation indicates that the defensive leadership in Utilities and Health Care and Technology is remaining somewhat intact despite weakening momentum in Health Care. These sectors look likely to be joined by Financials and Materials after a sharp bounce last week sees a pickup in momentum in these 2 sectors. A cross of the 100 RS-Ratio will confirm leadership in Financials and Materials. 

Leading (positive relative trend and positive relative momentum): Health Care and Utilities remain in the leading category last week but only Utilities is showing strengthening momentum while Health Care seems to be pulling back in momentum and strength. A move below the 100 RS-Momentum line will signify further weakness in Health Care. 

Weakening (positive relative strength and negative relative momentum): Technology and Real Estate remain in the Weakening category this week. Technology was showing signs of increasing momentum last week but this did not last while Real Estate has recently seen an increase in momentum which may see it return to the Leading category.

Lagging (negative relative trend and negative relative momentum): The Lagging category saw 2 new sectors join Discretionary this week – Industrials and Staples which both moved from Improving and Leading categories respectively and experienced sharp declines in momentum.

Improving (negative relative trend and positive relative momentum): 4 sectors are currently in the improving category with Energy and Materials and Financials showing signs of growing momentum. Financials and Materials look well-positioned to move to the leading category should their momentum continue this week. Communications experienced a reversal in momentum and looks likely to move into the Lagging category after an extended rally in the sector. 

XLB

Materials have had a strong recovery over the past 2 weeks with price moving back above the 21 W EMA and retesting this level last week. On the daily timeframe, XLB looks to have found support at the 100 D MA which provides evidence of a further rally back to the $88-$89 resistance level. 

XLV

After a significant rally, Health Care pulled back towards the end of last week and has twice rejected the $132.30 level. If price remains above this level, the outlook remains bullish with the expectation of the rally to continue this week. 

Market Observations

  • MHK – Break above the 100 D MA and consolidation range indicates further rally. Next resistance at $228. 
  • UPS – Price declined to an area of support at $190. Look for reversal back to the $210 area. A break above the 100 D MA will provide additional confluence for further rally. 
  • GM – Price has remained rangebound since April and is currently testing the bottom of the range. Look for bullish confirmation for reversal back to its range resistance at $62.

XLB

Materials have had a strong recovery over the past 2 weeks with price moving back above the 21 W EMA and retesting this level last week. On the daily timeframe, XLB looks to have found support at the 100 D MA which provides evidence of a further rally back to the $88-$89 resistance level. 

XLV

After a significant rally, Health Care pulled back towards the end of last week and has twice rejected the $132.30 level. If price remains above this level, the outlook remains bullish with the expectation of the rally to continue this week. 

Market Observations

  • MHK – Break above the 100 D MA and consolidation range indicates further rally. Next resistance at $228. 
  • UPS – Price declined to an area of support at $190. Look for reversal back to the $210 area. A break above the 100 D MA will provide additional confluence for further rally. 
  • GM – Price has remained rangebound since April and is currently testing the bottom of the range. Look for bullish confirmation for reversal back to its range resistance at $62.
Tony Zhang