The equity market is pulling back after being overbought, but the financial (NYSEARCA:XLF) sector could still have gains as conditions have become more favorable, said Jay Woods, Freedom Capital Markets chief global strategist.

The Changing Market Landscape

With a soft landing “increasingly conceivable,” according to Richmond Federal Reserve President Thomas Barkin, investors are optimistic about the market as financial conditions are set to ease.

But the markets are pulling back after being overbought, Woods said during a CNBC interview. “Now we have to just see if we can digest those gains.”

Market Performance and Prospects

The S&P 500 (SP500) is very close to its all-time high, recorded exactly two years ago, up 3.80% from a month ago and up 23.43% from a year ago. Now at 4,720.

Although technology (XLK) is going to continue to lead, some Magnificent Seven stocks have pulled back or have nicely based, and are poised to go higher, he said. “Amazon (AMZN) looks the best. It still hasn’t made that all-time high, it’s just trading at 52-week highs now, and it has a lot to reverse.”

Leadership in the Financial Sector

But the next group of leadership, he said, is financials (XLF). “JPMorgan — which reports on Jan. 12 — is trading within a dollar of an all-time high. That’s great leadership, up 27% last year.”

On the other hand, Citigroup (C) is trading at the same level they did in May 2011 when they did a 10-for-1 reverse stock split.

“The stock has done nothing for years, and all of a sudden, it stopped going down,” Wood said. “It broke its near-term downtrend. It’s got a lot to reverse, so over the longer-term, Citi may be poised to come back, and I think the conditions are starting to be favorable.”

Favorable Conditions for Financials

Those conditions include a Fed tailwind, dipping mortgage rates, and a recency bias into the mortgage market.