With yesterday’s sell-off in equities there was one portion of the price action I found interesting….the strength in financials ($XLF). While the S&P 500 ($SPX) took it on the chin, we saw the financial sector squeeze out a bit of out-performance. Finding strength in a down market can be a great tool to uncover what could lead the way in the next move.
Over the last few months I’ve discussed the shift in performance to favor the broad equity market rather than the financial sector. We looked at the trend line break and momentum divergence earlier this year that has led to $XLF under-performing $SPY for the last three months.
With the weakening in relative performance, the ratio between $XLF and $SPY has found potential support. Yesterday we saw the relationship bounce off the green dotted trend line from the June and July lows as well as the 38.2% retracement level. We also can see that the Relative Strength Index (RSI) is attempting to work off an oversold level as it gets close to breaking back above 30.
Group these three bullish signs for $XLF and we could see a shift back in its favor relative to the broad index over the next few weeks. We’ll see what happens.
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.
