What the Financials Are Telling Us

During the last twelve months we have seen the financial sector, based on the Financials Select Sector ETF ($XLF), outpace the overall equity market ($SPY). This has been bullish for equities as traders shift into the perceived ‘higher risk’ sector as prices continued to rise. However, as of late $XLF has been breaking down.

The chart below is a ratio between $XLF and $SPY. As the red line rises we know $XLF is outpacing the $SPY, with the opposite being true when the line is falling. We have an intermediate-term trend line off the August ’12 and April ’13 low (blue line) that appears to be being tested today. As Dynamic Hedge noted over the weekend, the short-term trend line off the April ’13 and June ’13 low (green line) has already been broken after a shift in relative performance has swayed away from financials.

Looking at momentum, we have a negative divergence taking place in the Relative Strength Index indicator (top panel of the chart). Similar to what we saw in March, as the ratio of $XLF and $SPY makes higher highs, the RSI indicator has put in a lower high. This isn’t what bulls want to see going into a test of an important trend line.

Going forward I’ll be watching the trend line off the August ’12 low to see if buyers are able to step in to keep the relative strength in the financials favor.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.