Gary Gordon of the ETF Expert states that the sector still remains weak because of the ongoing issues with the credit crisis, toxic assets, TARP, residential and commercial real estate defaults, foreclosures and subprime, just to name a few. (More on the challenges faced by financials).

Banks continue to fail in record numbers.  To prevent this from happening again, regulators are pushing for tougher changes in U.S. financial regulations, as the Senate’s top banking legislator on Tuesday proposed a new super-cop to police banks, a systemic risk agency and strong consumer protections, reports Kevin Drawbaugh of Reuters. At the end of the day, this new policy would create a single bank regulator and eliminate two. (More on financials).

Only time will tell if the proposed regulation passes and the sector benefits, but as of now, some think financials are weak.  The SPDR Select Sector Fund Financial (NYSEArca: XLF) is up 19.4%  year-to-date.

If you’re itching to play in the sector, mind the trend lines and have your strategy in place in case hiccups hit the funds. (How to follow trends).

For more stories on financials, visit our financial category.

Kevin Grewal contributed to this article.

Oil had been above $80 a barrel for much of the morning, but dropped back below that mark as the dollar continued to gain against the euro, report Donna Kardos Yesalavish and Geoffrey Rogow for The Wall Street Journal. PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP) is up about 0.5% this morning. (Read our currency report for more on currencies and ETFs).

The market’s dip is also being attributed to analyst downgrades of banks and concerns that Bank of America (NYSE: BAC) will have to sell shares in order to payback bailout money it received from the government, reports Rita Nazareth for Bloomberg. The Financial Select Sector SPDR (NYSEArca: XLF) is down more than 2% this morning.

Verizon Communication (NYSE: VZ) reported this morning that its third-quarter profit fell less than expected, by 9%. Gains in the company’s wireless division helped offset slower-than-expected growth in its FiOS television service, says Sinead Carew for Reuters. Vanguard Telecom Services (NYSEArca: VOX) is down more than 2.5% this morning; Verizon is 20.3%.

For more stories on telecommunications, visit our telecommunications page.

All eyes are on the troubled financial sector this earnings season as investors look for signs that the system is on the mend:

• Wells Fargo (NYSE: WFC) reported that its profit jumped 61%, but its loan losses also jumped to more than $5 billion. Wells Fargo is simply getting in line with other big banks, which have also reported big losses from loans gone bad, reports the Associated Press.
• Morgan Stanley (NYSE: MS) beat analysts’ expectations by reporting consolidated net revenues of $8.7 billion. The profit ends a three-quarter losing streak, and it can be attributed to Morgan Stanley’s new conservative stance in the wake of the financial collapse, Reuters reports.

Financial Select Sector SPDR (NYSEArca: XLF) is up about 1% this morning; Wells Fargo is 9.3%; Morgan Stanley is 2.8%

The euro has topped $1.50 against the dollar, a key threshold that raises concerns in Europe about what impact the strong currency will have on its recovering economy. European policy makers have been trying to make the euro weaker, but the markets aren’t paying attention, Neil Shah for The Wall Street Journal reports. CurrencyShares Euro Trust (NYSEArca: FXE) is up about 0.5% this morning.

A drop in gasoline inventories and a weakening dollar also contributed to the price of oil jumping close to $80 a barrel this morning. While the data was close to what analysts expected, it also confirmed that refiners have cut back enough that it’s depleted inventories, reports Brian Baskin for The Wall Street Journal. Last week, oil refiners pushed rates up to 81.1% of capacity, slightly higher than the week before. United States Gasoline (NYSEArca: UGA) is up nearly 2% this morning.

Read the disclaimer, as Tom Lydon is a board member of Rydex Funds.

Although many investors shudder at the mention of the word, the financial sector will one day be in favor again. The financial services sector has been a standout, reports Money and Markets on iStock Analyst.

• iShares Dow Jones U.S. Financial Services (NYSEArca: IYG): up 21.6% year-to-date

The rally may not be indefinite, since banks still have their share of problems. But there’s still opportunity there, since financial ETFs are still about 50% off their 2007 highs. (Play the capital markets recovery).

There are about 34 ETFs that track the financial sector, including:

• SPDR Select Sector Financial (NYSEArca: XLF): up 23.7% year-to-date

• iShares Dow Jones U.S. Financial (NYSEArca:  IYF): up 20.5% year-to-date

• Vanguard Financials (NYSEArca: VFH): up 18.8% year-to-date

XLF is focused exclusively on large-cap financial stocks. IYF and VFH own some smaller companies as well, but all three are well-diversified within the financial sector.

Make sure that you are well educated on market trends and follow the trend lines, especially as times are tenuous for financial companies as they work to get their books back in order. We follow the 200-day moving average as both the entry and exit point. This eliminates any emotional interference and keeps losses to a minimum. Read more about trend following in The ETF Trend Following Playbook.

For more stories about the financial sector, visit our financial category.

Yesterday, JPMorgan Chase (NYSE: JPM) set a high bar for earnings, but Goldman Sachs (NYSE: GS) and Citigroup (NYSE: C) failed to reach it when they announced their third-quarter results this morning. Goldman Sachs reported $3.19 billion in trading profits that beat expectations, but the stock dropped on declines in investment banking revenues. Citigroup reported a smaller loss than expected, but credit losses are high, report Sara Lepro and Tim Paradis for the Associated Press.

• Financial Select Sector SPDR (NYSEArca: XLF) is down about 1.25% this morning

Two positive signs for the U.S. economy emerged this morning: new jobless claims made a surprise drop to 514,000 and inflation stayed low in September. (How to play inflation, deflation and stagflation with ETFs).

The drop in the number of newly laid-off workers isn’t enough to signal that companies are in hiring mode, but it’s a sign that they’re at least slashing fewer workers, reports Christopher S. Rugaber for the Associated Press. It’s the fifth decline in six weeks.

Consumer prices rose 0.2% in September, which was in line with what analysts expected. Excluding energy and food, prices still rose 0.2%. (Read about the holiday retail sales outlook here).

Oil shot above $76 a barrel as the U.S. Dollar continues to weaken. The spike came after a report showed that fuel inventories declined by 5.2 million barrels. A drop of 700,000 had been anticipated. (Where gas prices may be headed).

• PowerShares DB Oil (NYSEArca: DBO) is up nearly 2.5% this morning

Read more about oil by visiting our oil category.

JPMorgan Chase & Co. (NYSE: JPM) is one of the first banks up to report third-quarter earnings, and the results are cheering Wall Street. The bank reported a $3.59 billion profit, but also stated that it had about doubled the money set aside for home and credit loan defaults in the quarter, reports Stephen Bernard for the Associated Press. Financial Select Sector SPDR (NYSEArca: XLF) is up more than 2% this morning; JPM is 12.3%.

Tech bellwether Intel (Nasdaq: INTC) also made good on its assurances that the PC market is slowly beginning to reboudn by reporting results that, while glum, surpassed expectations. The chip-maker reported that profits and sales dipped 8% in the third quarter. iShares Dow Jones U.S. Technology (NYSEArca: IYW) is up about 1.25% this morning; Intel is 6%. More on why semiconductors are doing well.

Oil prices have hit a one-year high above $75 a barrel thanks to new lows for the U.S. dollar, reports Claire Rangel for The Wall Street Journal. The dollar hit a 14-month low against a basket of currencies. Oil is priced in U.S. dollars, so as the dollar weakens the commodity becomes cheaper for those overseas.

Business inventories in August were cut for the 13th straight month, dropping 1.5%. It was more than what analysts had expected. On the flip side, sales by manufacturers, wholesalers and retailers rose 1%. Much of the boost came from the “cash for clunkers” program, reports Martin Crutsinger for the Associated Press. Read about the holiday sales outlook here.

For more stories on oil, visit our oil category.

The U.S. service sector grew for the first time in 13 months in September, and although jobs are still scarce, it’s still being called a positive sign for the recovery, reports Tali Arbel for the Associated Press. The index hit 50.9, and any reading above 50 indicates growth. The index tracks hospitals, retailers, financial services companies and truckers.

• Consumer Discretionary Select Sector SPDR (NYSEArca: XLY)

• PowerShares Dynamic Food & Beverage (NYSEArca: PBJ)

Bank of America (NYSE: BAC) said that it plans to choose an emergency CEO if Ken Lewis steps down before year’s end. Lewis plans to retire on Dec. 31. The Financial Select Sector SPDR (NYSEArca: XLF) is up nearly 2.5% this morning.

The Treasury Department has said that its program to assist banks in unloading their bad mortgages may be up and running by the end of this month, reports Edmund L. Andrews for The New York Times. Five out of nine money-management firms selected to buy the unwanted securities have raised the minimum amount needed – $500 million. Another four should complete financing by the end of the month.

Earnings season kicks off this week, with reports expected from Yum! Brands (NYSE: YUM), Family Dollar (NYSE: FDO), Costco (NasdaqGS: COST) and Alcoa Aluminum (NYSE: AA).

For more stories on the financial sector, visit our financial category.

SPDRs S&P 500 (NYSEArca: SPY), currently up 15.6% year-to-date, with average daily trading volume of 189 million, corresponds to the price and yield performance of the S&P 500 Index. The fund has a net expense ratio of 0.09%.

Sector allocations: information technology, 18.6%, financials, 15.2%, health care, 13.1%, energy, 11.7%, consumer staples, 11.6%, industrials, 10.2%, consumer discretionary, 9.2%, utilities, 3.7%, materials, 3.5%, telecom services, 3.2%

PowerShares QQQ (NasdaqGM: QQQQ), currently up 38.4% year-to-date, with daily average trading volume of 133 million, seeks to track the Nasdaq-100 Index. The fund consists of all stocks in the Index, which includes 100 of the largest domestic and international nonfinancial companies. QQQQ has an expense ratio of 0.2%.

Sector allocations: consumer discretionary 13.3%, consumer staples 1.1%, health care 16.3%, industrials 4.9%, info. tech. 63.1%, materials 0.6%, telecom services 0.8%

Financial Select Sector SPDR (NYSEArca: XLF), currently up 16.1% year-to-date, with average daily trading volume of 112 mil, tries to reflect the returns and characteristics of the Financial Select Sector Index.  The fund has an expense ratio of 0.21%. Top holdings include JP Morgan (NYSE: JPM) and Bank of America (NYSE: BAC).

iShares Russell 2000 Index (NYSEArca: IWM), currently up 19.8% year-to-date, with average daily trading volume of 72 million, tries to mimic results that correspond to the price and yield performance, before fees and expenses, of small capitalization sector of the U.S. equity market, Russell 2000 Index, which represents around 2,000 smallest companies in the Russell 3000 Index. The fund has an expense ratio of 0.24%.

Sector allocations: financial services, 20.5%, consumer discretionary, 16.8%, technology, 15.8%, health care, 15%, materials & processing, 8.2%, producer durables, 8.1%, utilities, 5%, other energy, 3.9%, autos & transportation, 3.5%, consumer staples, 2.6%

UltraShort QQQ ProShares (NYSEArca: QID), currently down 9.2% in the last month, with daily average trading volume of 36 million, seeks daily investment results that tracks twice the inverse of the daily performance of the NASDAQ-100 Index. Note the ETF tries to reflect a -200% return of the Index for a single day. The fund has an expense ratio of 0.95%.

Max Chen contributed to this article.

The Federal Reserve is meeting today and assessing the overall health of the economy to determine whether they will keep interest rates at a record low of close to 0%.  Additionally, investors are hoping to get some indication as to when the Fed plans on hiking rates.

Investors still have to decide on which industries are best positioned to perform well in the recovery, remarks Matt Krantz for USA Today. Possibly the worst thing any investor could do is jump in after sectors that have already gained, continually chasing performance.

After betting on financials and tech companies, investors are now looking for actual economic growth in the second half of the year, especially in consumer discretionary companies that make big-ticket items such as automobiles and appliances. Krantz notes, however, that investors are applying prudent techniques when picking out future winning sectors:

History. Certain sectors and certain companies do better at certain points of an economic cycle. If the past repeats itself, solid performance could come out of consumer discretionary stocks, along with materials and industrial companies. These “cyclical” sectors could gain as demand for goods picks up. Later, energy stocks could gain as companies expand to cover all the demand.

• Consumer Direct Select Sector SPDR (NYSEArca: XLY): up 30% year-to date
• iShares Dow Jones U.S. Basic Materials (NYSEArca: IYM): up 55% year-to-date
• SPDR Select Sector Fund- Basic Industries (NYSEArca: XLB): up 43% year-to-date
• Energy Select Sector Energy Fund (NYSEArca: XLE): up 17.7% year-to-date

Cycles. Growth in revenue is still down and may continue to be so in the third quarter, but some businesses could show early growth. The businesses that will perform will be the ones to stop cost cutting and start expanding. This is one of the reasons why financials may continue to benefit as demand for loans increases.

• SPDR Financial Select Sector (NYSEArca: XLF): up 23.3% year-to-date

Diamonds in the rough. Some small banks and brokers may stand out by enticing customers who have become estranged from large financial firms. Modernization of bridges and roads will lead to a boom in the infrastructure industry. Government investment into green tech will also likely help the alternative energy industry. As more companies use the internet to conduct business, business that build internet networking systems may also become in demand.

• iShares S&P Global Infrastructure (NYSEArca: IGF): up 13.8% year-to-date
• PowerShares Wilderhill Clean Energy Portfolio Fund (NYSEArca: PBW): up 28.9% year-to-date
• iShares Networking Fund (NYSEArca: IGN): up 61.7% year-to-date

Not so good. Sectors dependent on consumers may not see previous cash flows for awhile yet. Businesses such as retailers, restaurants and casinos may also continue to struggle.

Watch the trends. There’s no such thing as a “sure thing” in the markets, otherwise no one would ever lose anything. We can all guess which sectors will perform and which won’t, but reality could bear out differently. Watch the trend lines to spot the true opportunities, and have a stop loss in place, as well.

Max Chen contributed to this article.