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The financials have bigger problems than the Fed, strategist warns

In a good year for stocks, one group's lack of performance is conspicuous: The financials, which is the only S&P 500 sector down on the year.

Many have suggested that it will take a Fed rate hike for the group to get back on its feet. After all, low rates cause a problem for many financial stocks, since they reduce the amount these companies can receive for lending out the funds parked with them.

But for Boris Schlossberg of BK Asset Management, buying the financials in anticipation of coming rate hikes from the Fed is a bad strategy — not just because the central bank is unlikely to raise rates rapidly even if it does make a move Wednesday, but because financials have bigger problems than low rates alone.

"I think financials may be in for a secular shock," Schlossberg said Tuesday on CNBC's "Trading Nation." "They're certainly under a huge amount of assault, both from a regulatory point of view as well as a technology point of view."

In terms of regulatory risks, Schlossberg pointed to the "disaster" at Wells Fargo, on the day the company's CEO took to Capitol Hill to answer a barrage of tough questions regarding the bank's widespread creation of unauthorized accounts. When it comes to technology, the strategist notes that new tech-focused companies "are going to assault financials from every single angle."

"I wonder if the whole business model may be under reconsideration by investors," making whether to invest in the financials as a sector "a much deeper question than simply where the yields are going to go."

Still, if the Fed points away from a 2016 hike, the outlook could get even worse. "The financials, already on the ropes, could see a further setback in a lower for longer scenario," Michael Block of Rhino Trading Partners wrote in a Tuesday note.

Eyeing the charts, technical analyst Jeff Weiss of Clearview Trading Advisors observed on "Trading Nation" that the sector has "broken out above [its recent] trend line," but still faces resistance at higher levels.

Through Tuesday's close, the sector is down 0.2 percent in 2016 while the S&P is up 4.7 percent.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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