Alan Brochstein shares his view on the rally, the market’s likely direction and influence of the financial sector. – Ilene 
Financials Flashing Yellow
Courtesy of Alan Brochstein at AB Analytical Services
In early January, I shared my views that the rally was ending, a timely call. I had noticed, among other factors, that Financials were diverging dramatically. I have been seeing a similar type of action over the past few days that concerns me. The good news is that I don’t think that my conclusion is that the rally is ending but rather that it needs to correct. I am still sticking to my views that we are in a range of 730-750 on the downside to 860-920 (880 single estimate) on the upside for the S&P 500. I wish I were confident about whether we are going to establish the top or the bottom first. I believe the bottom, but the resilience of the market leaves me with low conviction. It would be healthier to establish the bottom first.
Before going on, I believe that Financials are an extremely important indicator at this time. While I don’t think that they need to lead, they need to be advancing in line with the rally rather than lagging. While this chart of the Sector SPDR Financials (XLF) is very short-term in nature, I believe that it gives some insight into the near-term direction of stocks:
A few observations:
- Unlike the November Rally, XLF finally broke the 50dma
- Since the 3/19 gap up/reversal, XLF has lagged the rallying market
- Lower panel shows the longer-term perspective of XLF still lagging market
The market has advanced to new rally highs over the past few days, but Financials have been stuck since 3/19. The stall in Financials concerns me, and I expect that if they weaken, the rest of the market will take the cue. Support for XLF is at 8.50 (the 50dma that proved to be so elusive as resistance from mid-September through mid-March). Below that is the January lows of 8. I don’t expect that their weakness indicates that the rally is over, but I do think that they could be signalling a correction in the coming days.
Disclosure: No position in any stock mentioned in this report, though I am long an inverse ETF related to XLF.
