I often hear the assumption by media pundits that in any kind of a move higher in equities, the energy sector would outperform and that commodities are the way to play a rising stock market.
While this may have been true for the past few years, I actually think that the next bull market gets led by financial exchange traded funds and not energy.
Consider that China’s economy is clearly slowing down, and that it has been the greatest driver of commodity demand for pretty much the last decade. More so than that though, from a contrarian standpoint, bearishness is immense in the financials sector, so why couldn’t it be on the verge of a multi-year period of strength?
Take a look below at the price ratio of the Financial Select Sector SPDR (NYSEArca: XLF) relative to the Energy Select Sector SPDR (NYSEArca: XLE). They are sector ETFs. As a reminder, a rising price ratio means the numerator/XLF is outperforming (up more/down less) the denominator/XLE. Focus not on the ratio but on the trend itself.