I spend a great deal of time evaluating the financial sector because I believe it's the most influential group in terms of leading the market. Financials underperformed miserably in 2007 and 2008 and overall market performance followed suit. In 2009, financials outperformed and the market recovered a lot of its prior losses. But in 2010, the market doesn't quite seem to know what to do about the lagging financial sector. Year-to-date, our major indices are up as follows:
Dow Jones: +6.09%
S&P 500: +5.48%
NASDAQ: +8.80%
Russell 2000: +12.44%
The financials? Well, the Dow Jones US Financial Index ($DJUSFN) is roughly 1% higher, badly lagging the major indices. Take a look at the chart below and you'll see another failed breakout attempt in this sector:
The financials performed extremely well from February to April of 2010 and the overall market did very well also. Since April, however, the financials have performed miserably. Yes, our major indices have had their moments where we've seen straight up moves, but the overall direction since April has been sideways at best. In my opinion, the market is awaiting leadership from financials and if last week's initial reaction to JP Morgan's (JPM) earnings is any indication, the market may not like the kind of leadership it's about to get. Financials had an opportunity to seize a major breakout and they simply choked. Foreclosures, high unemployment, sagging consumer confidence, etc. are taking their toll on this sector.
Google (GOOG) provided a huge lift to the NASDAQ, especially the NDX, last week based on its blowout earnings, but I do not believe these types of gains will be sustainable if the DJUSFN cannot break that 271 resistance level. Believe me, there are no clearcut signs in this market. Several indicators say BUY, but many others say SELL. Certain indicators, like the MACD, are suggesting this rally has a long, long way to go potentially. Before I buy into that theory, however, I want to see a technical breakout in financials. A close above 271.00 on the DJUSFN and 48.10 on the Bank Index ($BKX) would provide a HUGE boost to our major indices. Should the financials actually begin to gain strength, we're keeping a very close eye on an insurance stock that could be poised to make a nice run to the upside. We're featuring it as our Chart of the Day for Monday, October 18, 2010. CLICK HERE for more information.
Market timing could be an issue soon as well. September 2010 is now in the record books, defying historical bearish trends for that month. While the September 2010 gains were the strongest September gains since the 1930s, we still need to take a step back and objectively look at the big picture. Despite a great September, that months still looms as the worst calendar month of the year, and it's not even close. Now we are quickly approaching the single worst week of the year historically. The stock market's historical tendencies are the subject of our next Online Traders Series event, scheduled for Monday, October 18, 2010. I will discuss, in detail, the upcoming bearish period that has produced MINUS 53.82% annualized returns over the last six decades, and share other remarkable statistics about historical trends that can help in your trading. For more details, CLICK HERE
Happy trading!
