Financial sector exchange traded funds got a lift Monday from the rally in bank stocks as Citigroup (NYSE: C) led the way, gaining over 6%. However, one technical analyst says the sector’s outlook remains bleak and recommends shorting the financial ETF.

Financial Select Sector SPDR (NYSEArca: XLF) was up nearly 3% in afternoon trading Monday following a miserable Thanksgiving week. Hopes that European leaders are working toward a solution to the debt crisis and reports of solid Black Friday retail sales in the U.S. helped boost sentiment.

“Equities are rallying from oversold today following seven consecutive down sessions. The downtrend off the October high still remains and we expect a reassertion lower once the bounce has exhausted itself,” said Tarquin Coe at Investors Intelligence.

“Financials are popping hard and that is an opportunity to sell. Financial Select Sector SPDR remains in a clear falling trend channel off the October high. The sector itself has been an underperformer since mid-2009 and the story has not changed over the weekend,” he wrote in a newsletter on Monday.

The ETF, which tracks the financial component of the S&P 500, was down by about 25% year to date heading into Monday’s trading.

“This ETF provides comprehensive exposure to the U.S. financials sector, which includes banks, insurance firms, real estate companies, financial exchanges, and general finance firms. Investing in the financials sector requires a strong risk tolerance and the understanding that the sector is in recovery mode and will be susceptible to setbacks if the economy falters,” Morningstar says in a profile of the fund.

The financial ETF has been lagging the S&P 500 in November and the sector needs to stabilize before the market can make a sustainable move higher, analysts say. [Banks Drag Stock ETFs Lower]

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.