Financials still look pretty bleak after snapping their worst losing streak on record

Financial stocks were thought to be the market’s darlings at the beginning of 2018, as a marriage between the Trump administration’s deregulation efforts and an increasingly hawkish Federal Reserve should have created the sector’s picture-perfect environment.

The price action couldn’t have been more different. Financials badly underperformed the broader market in the first half of the year. The financials-tracking XLF has been modestly positive in recent sessions, but only after posting its longest losing streak on record — 13 days.

Some see more pain coming. The technical picture is still rather "cloudy" for the XLF, said Craig Johnson, chief market technician at Piper Jaffray. He told CNBC’s "Trading Nation" why there appears to be pain ahead.

• Despite relatively positive stress test results last week, banks as a group closed lower on the week, and the charts remain dubious. The XLF bounced off support near the $26.50 mark, but it remains to be seen whether the recent bounce can hold.

• Breadth within the sector, or the number of stocks advancing relative to the number of stocks declining, is weak. Just 25 percent of stocks within the financials are trading above their 200-day moving averages, the lowest of any S&P 500 sector.

• This forecast runs contrary to the XLF’s historical performance after posting losing streaks of seven days or more. Piper Jaffray found the XLF has generated positive average and median returns of 6 percent and 2.3 percent, respectively, over the subsequent four weeks.

• Investors should look to small- and mid-cap banks, over large-cap financial stocks, at this juncture, as they appear more constructive when considering their relative strength, momentum and breadth.

Bottom line: The financials have undergone technical damage in recent weeks, and Johnson said several technical measures point to further downside.

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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.

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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