B4LLS
Introduction
Federal Reserve Chair Jerome Powell has indicated that the US central bank plans to continue raising interest rates in order to bring inflation back to normal. This approach presents headwinds for the overall stock market, and makes it particularly difficult for growth stocks, which are more vulnerable to changes in interest rates. This article looks at the outlook for a sub-segment of new-age growth stocks; fintech.
FINX Fintech Proxy Keeps Sliding Down
The Global X FinTech Thematic ETF (NASDAQ:FINX) provides investors with exposure to the growth potential of the fintech industry. The key themes covered in the ETF are as follows:
FINX Fintech Themes (Global X Fintech Thematic Fact Sheet)
FINX ETF Composition
FINX ETF is a diversified index with no single stock making up more than 10% of the overall exposure. The top 5 holdings make up 34.7% of the overall index. Fiserv (FISV), Intuit Inc (INTU), Adyen N.V. (OTCPK:ADYEY), Block Inc (SQ) and PayPal Holdings Inc (PYPL) make up the top 5 holdings. The top 5 holdings are roughly equally distributed. It is a moderately diversified index.
FINX ETF Top 5 Holdings (FINX ETF Website, Author’s Analysis)
Key Fundamental Drivers for the FINX ETF
High Interest Rates
As the Federal Reserve raises interest rates to combat inflation, the cost of waiting to receive profits from investments increases. This can be especially problematic for growth stocks, which may not generate profits for several years. In the case of fintech, there is the added complexity of credit risk, which makes fintech growth stocks much more exposed to sharp, unfavorable changes in rates. The evidence proves this:
Fintech growth underperforms smallcap growth (TradingView, Author’s Analysis)
As can be seen by the decline in the relative chart above, fintech growth stocks have underperformed even the more volatile small-cap growth stocks.
Another key reason for this underperformance may be:
High Risk Fintech Models
Some new-age fintech models such as ‘Buy Now Pay Later’ (BNPL) are likely prone to unsustainable credit growth, which leads to high defaults and a breakdown of the core business model. Indeed, some experts from Harvard have warned about the dangers of additional consumer debt:
When people start buying household goods on credit, that signals a problem.
– Marshall Lux; Harvard Kennedy School Fellow
More recently, the Consumer Financial Protection Bureau (CFPB) has launched an inquiry into popular BNPL programs. The outcome of such investigations is a key thing to monitor that will impact the performance of the FINX ETF.
Given that fundamentals backdrop, here is how I am reading the technicals on FINX:
If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do, utilizing principles of Flow, Location, and Trap.
Read of Relative Money Flow
FINX vs SPX500 Technical Analysis (TradingView, Author’s Analysis)
The FINX/SPX500 pair is in a continuous downward move since the last two years. I do not see any clear signs of support. There have been no signs of a pullback apart from a little consolidation observed in July 2022. Currently, there is no clear indication of price forming a base, which is a necessity if it is to show genuine signs of reversal. Also, there is a lack of bull traps, which removes any reason for a sell entry. Thus, I have a ‘hold’ stance on FINX/S&P500.
Read of Absolute Money Flow
FINX ETF Technical Analysis (TradingView, Author’s Analysis)
For the standalone FINX ETF, a clear bearish setup can be seen if price gives a pullback towards $24. There has been sharp volatility observed at key resistance areas of $24 and $28. There are chances of a pullback at the current levels of $18.60 since history suggests bulls have found this area to be attractive, showing support at this area. I believe there will be some range bound activity as shown in the chart. Therefore, this too makes me have a ‘hold’ stance on FINX.
Summary
Overall, I believe there are no signs of a bottom yet on FINX. The sellers’ rally down may be overextended, but it would be a better reward:risk play to rejoin the sellers at the culmination of a bull trap. On the fundamentals side of things, I am keeping a close eye on interest rates and also the events that would unfold from the CFPB’s inquiries into BNPL models. This is likely to be a key catalyst for creating large moves on FINX on either side. Overall, I believe the FINX ETF is a ‘hold’.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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