These hot stocks are just 'waking up;' now could be the time to buy

Though the financial sector has posted solid gains this year, it's still trailing six other S&P 500 sectors. At these levels, some analysts and portfolio managers are making the case for getting into the banks and other financial stocks.

The performance of the popular financials exchange-traded fund, the XLF, relative to the S&P 500 recently broken above years-long resistance identified by Ari Wald, head of technical analysis at Oppenheimer. A rounded long-term base of support in the relative relationship boosts Wald's bullish outlook on the sector.

"I think it argues for additional outperformance as that line starts to kick higher. It has also been a very broad-based move; it's been the banks, it's been the brokers, asset managers, security exchanges," Wald said Monday on CNBC's "Power Lunch."

Wald added that the sector has rallied even in the face of falling interest rates, which is generally seen as a negative factor for financial institutions. In a note to clients on Saturday, Wald recommended buying the ETF, which on Monday was trading near 10-year highs, and several individual names like JPMorgan and Citigroup.

"This is very telling. It shows that the strong players have been reluctant to sell, the bad news is likely discounted … and we think this sector is poised to rally," he said.

The broader sector has largely been "dead money for so long, and suddenly it's waking up," said Eddy Elfenbein, portfolio managers at AdvisorShares and editor of the Crossing Wall Street blog. Part of the sector's so-called reawakening is due to its broadly positive stress test results released in June.

"I think that sent a strong message to investors. Also, recently, I think we are going to see some regulatory relief. There has been a lot of talk about this, and now we are actually seeing that go in the process," he said.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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