Is The Financial Sector’s Luck About To Change?

While Healthcare (XLV) has been the strongest sector for 2013, the financial sector (XLF) has been leading the equity market since last August. Looking at the chart below we can see the strong up trend in the ratio between the Financials Select Sector SPDR ETF (XLF) and the S&P 500 (SPX). As the green line rises XLF is outpacing the large cap equity index.

Looking at the top panel of the chart, we can see momentum based on the Relative Strength Index. From the August low RSI has been able to hold the 50 level as support outside of the period of weakness in March. This is a good sign that the trend has the potential to continue.

However, we are starting to see a slight divergence in momentum as the ratio between XLF and SPX rises, the RSI indicator has been making lower highs since May. This isn’t the first time we’ve seen this during the current up trend, the same thing occurred during the first three months of 2013 and Oct/Nov of last year. Each time the ratio was able to hold its trend line and regain support in momentum.

Going forward there are two trend lines that could come into play if financials begin to lose their grip. The first is off the August ’12 low and the second is off the April ’13 low. These need to be violated for the financial bears to gain any level of confidence. Looking back at the Relative Strength Index, we would need to see a break below 50 and resistance near the 50-60 level for momentum to confirm a potential shift in relative performance in favor of the S&P. We’ll see if XLF can continue to lead or the sector’s luck is about to change.

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.