Wednesday, January 29, 2014

Financials Leading the Way Down (C; GS; TRV; XLF)

Not a good sign.
From Barron's Getting Technical column:
Citi, Goldman, Travelers and other big financial companies have lost their mojo, and are falling faster than the market. That's a bad sign.

Quality leadership is always important in a healthy stock market. When financial stocks finally ascended to that role a few weeks ago to join the technology sector, the outlook brightened considerably. But it was not to last, and many financial stocks, from banks to insurance, have fallen quite sharply. Without financials, the market has lost an engine, and that spells trouble.

The Select Sector SPDR Financial exchange-traded fund (ticker: XLF) is down only about 4.5% from its Jan. 15 high versus about 3.5% for the Standard & Poor's 500, but its position relative to the market has changed. Specifically, the trend of improving performance in place since November is broken (see Chart 1).

Chart 1

Select Sector SPDR Financial ETF
Throughout the rally following the last significant market correction in mid-2011, the stock market moved nicely higher when financials were in the lead and stumbled when they were not. With the latter condition back in force, we now have evidence that stocks are in for a bumpy ride.

It is far from a bear market signal because both the S&P 500 and the financial ETF are sitting on important support levels, but there is little room for error. If the ETF drops below Monday's low of $20.86, it will have little in the way of an additional 7.5% drop to support near $19.40 set by August and October lows and a critical long-term trendline drawn from October 2011. It traded at $21.07 Wednesday afternoon.
Within the group, insurance stocks of every type are leading to the downside. For example, property and casualty insurer Travelers (TRV), a member of the Dow Jones Industrial Average, is down nearly 9% year-to-date and moved below its own October 2011 trendline. While currently oversold in the short term, the long-term bull run is clearly over.

What is probably more frightening for the bulls is the recent breakout failure in the bank group. Citigroup (C) started the month by rallying above an eight-month resistance level, but within a few days it collapsed back down below it (see Chart 2)....MORE