Will sudden relative weakness in Financials weigh on the market? (XLF, SPY)


A tug-of-war between the bulls and bears was the dominant theme of yesterday’s indecisive session, which concluded with the bulls having the upper hand. Getting off to a nervous start, the major indices were trading approximately 1% lower after the first 30 minutes of trading. However, buyers stepped in to lend support, enabling stocks to move back to the flat line by mid-day. Choppy trading ensued in the afternoon, but the main stock market indexes still closed solidly higher and near their intraday highs. The S&P 500 Index rose 0.5%. The Dow Jones Industrial Average and Nasdaq Composite registered matching gains of 0.4%. The small-cap Russell 2000 and S&P MidCap 400 indices jumped 1.0% and 0.8% respectively.

Although intraday price action may have started out a bit shaky, volume ticked higher across the board, confirming the gains of yesterday’s session. Total volume in the NYSE was 12% greater than the previous day’s level, while turnover in the Nasdaq rose 13%. The higher volume advance enabled both the S&P and Nasdaq to score a bullish “accumulation day,” indicative of institutional buying. It was the sixth such occurrence this month. In the NYSE, advancing volume exceeded declining volume by a healthy margin of 3 to 1. However, the Nasdaq adv/dec volume ratio was only fractionally positive by little better than 1 to 1.

Last night, we took an updated look at the recent performance of 25 industry sectors, using “percentage change charts” that compare each index with the percentage change of the benchmark S&P 500 Index. Over the past two weeks, only a few industry sectors have been showing clear relative strength to the broad market by outperforming on the up days, and faring better than the major indices on the down days. Semiconductors, Retail, and Internet are three such industries (semiconductors only began perking up a few days ago). However, what really caught our attention was a laggard performance of Financials over the past week. To clearly show this, check out the chart below, which compares the relative performance of the S&P 500 SPDR (SPY) versus the Financial SPDR (XLF) over the past 10 days:


What’s interesting about the chart above is that XLF did not begin showing bearish divergence and relative weakness to SPY until September 21. In the five days prior to that period, notice that XLF and SPY were trading in sync with one another, but XLF has suddenly become a laggard. This is also the case on the daily chart, as XLF still remains well below its August highs. We do not point out the relative weakness in XLF to suggest selling short the financial ETFs, as current sentiment favors the bulls and the long side of the market overall. Rather, we bring the relative weakness in Financials to your attention because the sector is so heavily weighted within the broad market. As such, unless XLF (as an ETF proxy for the overall financial sector) gets back in sync with SPY, we believe the relative weakness in the financial arena will begin weighing on the overall market rally very soon. In fact, the performance of the financial sector is commonly a leading, not lagging, indicator of broad market direction.

In yesterday’s commentary, we illustrated that the S&P 500 (as a proxy for the broad market) is at a pivotal crossroads. Even though the S&P advanced on higher volume yesterday, the index still remains below last week’s high. Therefore, nothing has really changed on an overall technical level. Nevertheless, yesterday’s “accumulation day” was indeed bullish, and increases the possibility of the major indices moving higher from here. But based on the choppy intraday price action of the broad market yesterday, it is prudent to stay alert and not place any aggressive bets on the market while stocks are consolidating at key resistance levels.

Today’s Watchlist:

JPMorgan Alerian MLP (AMJ)

Shares = 200
Trigger = 33.54
Stop = 31.48
Target = (will send alert)
Dividend Date = n/a

Notes = This setup from September 27 did not yet trigger, but remains on our watchlist going into today. Note the slightly higher trigger price today, just above yesterday’s high. AMJ has been trading in a tight range just above the 50-day moving average the past few weeks. A rally above the September 22 high is a valid entry point, in anticipation of a resumption of the dominant trend.

Daily Performance Report:

Below is an overview of all open positions, as well as a performance report on all positions that were closed only since the previous day’s newsletter. Net P/L figures are based on the $50,000 Wagner Daily model account size. Changes to open positions since the previous report are listed in red text below. Please review the Wagner Daily Subscriber Guide for important, automatic rules on trigger and stop prices.

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  • No changes to open positions today.
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      Edited by Deron Wagner,
      MTG Founder and
      Head Trader