The Financials are Back, Hooray!?!?

• Posted by Greg Harmon
• on December 13th, 2010

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.

More Evidence

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.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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