What is Driving the Sell Off in the Financial Sector?

Recently, the Material sector has seen a significant influx of capital, climbing over 15 per cent since mid-September, driven by China’s latest stimulus measures. Meanwhile, the Financial sector has come under pressure due to global rate cuts, with a domestic cut anticipated soon. As market capital shifts from Financials to Materials, the question arises: should you consider selling your financial stocks and pivot toward resources?

Before tackling that, let’s first explore what’s fuelling the surge in the Materials sector. Australia's mining industry is heavily reliant on China, so when Beijing announced stimulus measures to revive its sluggish economy, materials stocks took off.

Breaking down the key support levels for the Big 4 banks

While the reason for miners’ recent gains is clear, could these same rate cuts be driving a sell-off in the Financial sector? Historically, rate cuts don’t favour bank stocks. However, it’s important to keep things in perspective. The Financial sector has surged over 40 per cent since October 2023 without any significant pullbacks. As markets don’t rise endlessly without corrections, it’s possible that the long-expected pullback in the Financial sector may finally be happening. But the key question remains—when is the right time to sell?

For those holding positions in the big four banks, here’s a breakdown of the key levels to watch.

Commonwealth Bank (ASX: CBA)

After reaching a new all-time high near $150 in September, CBA has since dropped more than 8 per cent. The stock is hovering around a key support line, and if it fails to hold around $132, watch $120 for the next level of support.

ANZ (ASX: ANZ)

ANZ broke out of a consolidation phase in August and is currently sitting near $30. If this level holds, there’s potential for a 20 per cent upside as it could make a run back to its all-time high. If it breaks below $30, $28 may offer a strong buying opportunity.

Westpac (ASX: WBC)

Westpac has climbed over 40 per cent this year, peaking around $34. It now appears to be heading toward $30, which could present a good entry point if support holds at that level.

NAB (ASX: NAB)

NAB has outperformed CBA recently, surging more than 50 per cent from its June 2023 low. A pullback seems overdue, so keep an eye on the $35 support level. If this fails, the price may drop toward $33 before stabilising.

What were the best and worst-performing sectors last week?

The best-performing sectors included Energy, up 6.73 per cent followed by Healthcare, up 1.55 per cent and Utilities, up 0.89 per cent. The worst-performing sectors included Consumer Discretionary, down 2.55 per cent, followed by Financials, down 1.97 per cent and Consumer Staples, down 1.59 per cent.

The best performing stocks in the ASX top 100 included Woodside Energy, up 9.36 per cent, followed by Santos Limited, up 6.73 per cent and REA Group, up 6.63 per cent. The worst-performing stocks included IDP Education, down 6.12 per cent, followed by Qantas Airways, down 5.66 per cent, and Flight Centre, down 5.39 per cent.

What's next for the Australian stock market?

Sellers emerged last week, with the All Ordinaries Index snapping a four-week rally to close over half a per cent down. This reversal isn't surprising, as the market reached yet another all-time high last week while also completing the bullish stage of a pattern that has unfolded since November 2023 – four consecutive weeks rise followed by a few weeks down.

As last week marks the fourth week up, I anticipate a few weeks down with a target of 8,350 points. Should sellers push harder, the next strong support level is around 8,150 points.

Beyond the anticipated short-term pullback, what should we expect for the month of October? Historically, October tends to be negative, with data spanning the past 40 years supporting this trend. Considering the market's current four-week run-up, October looks like it will follow history. However, there's a major factor to watch.

The materials sector is surging, driven by positive news from China regarding stimulus measures. Many of our key material stocks have skyrocketed, and if this momentum carries through October, the market could climb even higher, possibly reaching 9,600 points. Additionally, the Financial sector appears to have found short-term support after its recent retracement. We haven't seen both the Material and Financial sectors rise together this year, but the conditions are in place for that to happen now.

Therefore, if you haven’t already, it’s worth taking a close look at both financial and material stocks to avoid missing out on the opportunities currently emerging.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.