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Making the case for financial stocks: strategist

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Big cap financial stocks have jumped about 40% since October, but TD Ameritrade chief market strategist JJ Kinahan tells Reuters' Fred Katayama why he sees them moving even higher.

Video Transcript

FRED KATAYAMA: Investors selling some big name tech stocks, as they rotate into value stocks Wednesday, putting a damper on the S&P 500 and the NASDAQ.

Let's get some sense as to what direction this market is headed. For that, we turn to JJ Kinahan, Chief Market Strategist at TD Ameritrade. Welcome back, JJ, and good afternoon to you.

JJ KINAHAN: Thanks for having me, Fred. Always a pleasure to be here with you.

FRED KATAYAMA: Great, always, to have you, JJ. Now we've got a mixed market today. But Monday, we saw that sharp, steep big rebound, followed Tuesday by a sharp downturn. So where is this market heading?

JJ KINAHAN: Well, I think, Fred, if you even go back to last week, where you saw the up-down days every single day. I think where it's really heading is people trying to figure out what to do right now. And what I mean by that is you saw this sharp increase in bond yields over the last few weeks. And at the same time, what's been tough for people to figure out, if there have been many days where bond yields are higher and so is stocks, or bond yields are lower and so is stocks. That's not a normal relationship.

So what that tells me is that right now you're seeing a little bit of a adjustment of assets, if you will. Not completely surprising if you think about the time of year. We're starting to head into the end of the first quarter. And we have, a week from Friday, we have quadruple witching expiration, in terms of futures, options, stocks. So you often see people readjusting their portfolios, especially big funds, around that time.

So that, to me, explains a lot of what's going on. And I think as your viewers think about the next few weeks. I think they should think about a volatility rate. If you look at the VIX, it just seems hard for me to believe that we don't stay bouncing back and forth between sort of this 22 and 30 on the VIX. As we have sharp down days, people will come in and buy protection. As we go back up, all of a sudden the people will make they feel they don't need it. But I think also the strained relationship between bonds and equities may continue for a few weeks also.

FRED KATAYAMA: JJ, I know at TD Ameritrade, you've got a good handle on investor sentiment and what they're buying and selling. What are you seeing? And what does that tell you about where the market may head?

JJ KINAHAN: Sure. So if I look back, we released our IMX every month. In fact, we have a new one coming up Monday, which shows what our clients are doing for the month and what I see during the week in between that. It's been really interesting, to me, is Apple had a tough time the last couple of months. We've seen Apple-- I shouldn't say a couple months, but last month, earlier this month-- we've seen Apple be a major buy of our clients overall. Kind of interesting from that point of view.

Also, the energy stocks, the big energy stocks, the ExxonMobil, the Chevrons of the world, which is, again, we saw an incredible rally so far this year in oil, so that's not completely nonsensical. But the part that may be working against them is with higher rates, at some point do you start to see them being less appealing from a yield play point of view? Because one of the thing about the energy stocks is they tend to be very appealing from yield.

Now I want to put that in perspective. We're still not above 1.5% on the 10-year yield. But that is something, as we head throughout the year, to watch. And I think that, as you know, I talk about people mixing, remixing their portfolios, it's interesting for me to see how well those stocks have performed over the last few weeks.

FRED KATAYAMA: And lastly, JJ, are there-- what stocks, or sectors, or bonds, or fixed income sectors, should investors be in right now amidst this period of volatility? People talk about the great rotation, but a lot of those value stocks have appreciated quite a bit too.

JJ KINAHAN: Well, you know, it's really interesting to me. I think that, I look where our clients are, and an area that I find really interesting is sort of the big cap financials. And the reason being, and many of them have already had a great move. But as rates continue to go higher, they should be the primary beneficiaries. And the reason I say that is this. Think of the fantastic job they've done with every single headwind over the last few years against them. They've been able to increase fees or go to other areas of business to add to their business.

Well, now, if they can start to do what we actually know as true banking functions, paying one rate on savings, lending out at a higher rate on loans, and that goes to a big spread, they can start to send that money right to the bottom line overall, because they're operating very lean. And with that, they've also found ways to get other areas where they can charge and they can continue to grow that revenue also.

FRED KATAYAMA: Got it. OK. Thank you. And thanks for the tip about financials. Appreciate it.

JJ KINAHAN: All right, Fred. Always a pleasure. Thank you.

FRED KATAYAMA: Good seeing you.

Our thanks to JJ Kinahan of TD Ameritrade. I'm Fred Katayama in New York. This is Reuters.