There is growing evidence that the Financial Sector has woken up and is now ready to make an impact on the markets. Frequent readers of my research will be familiar with my light-hearted chart of the Financial Select Sector SPDR, XLF, below showing that it has been in a range for a very long time, unwilling to break out either way, until many of the financial issues in Congress are settled.
XLF Weekly Chart
But there is also a serious side to it, using the symmetry of the market as a guide for timing, the break out should be upon us. And recently XLF has been showing signs of a break out.
Let me introduce a new chart tonight showing further evidence that the Financials are waking up. This chart shows the XLF relative to the S&P 500 ETF, SPY in the top frame, and the SPY itself in the bottom frame. I have added a line connecting the midpoint in the top frame for reference.
XLF vs SPY Weekly Chart
Notice that for the period from the market fall to its bottom in March 2009, and then its subsequent rise through to April 2010 and pullback into July 2010, the ratio of XLF/SPY was strongly correlated to the price action in the SPY itself. Then something strange happened. From July until November 2010 the ratio became negatively correlated, moving in the opposite direction of the price movement in the SPY. This is much easier to see in this ratio chart than in a straight comparison of XLF to SPY with the naked eye.
The new evidence that the Financial sector is back and involved comes from the third panel. Notice that the ratio of XLF/SPY is now again positively correlated with the SPY price movement. This can be good or bad news for the market. The Financial sector has had a very good run lately and may be ready to pullback or consolidate. Whichever way Financial stocks move, look for the broader market to move with the Financials again.
(As always you can see details of these individual charts and more on my twitter feed and on chartly.)
Gregory W. Harmon has worked in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity and Portfolio Swaps Trading at Chase Manhattan, State Street Corporation and BNP Paribas. (More)
Sign up for your FREE e-mail newsletter delivered each morning with the latest investment news.
Which update would you like to receive?
Overheard on StockTwits
Chartly Technical Knockout
AR Energy
Macro Weekly
AR Options
The official StockTwits™ newsletter
This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.
Copyright © 2010 Dragonfly Capital. All rights reserved. Blog Design by Genevate
Read Full Article »