We go into another week watching the S&P 500 mindfully to see if the equities markets have any staying power above recent resistance levels, as the index again flirted with its 200 day moving average line (currently 1,263.32).

Overall volumes were slightly below average last week, but it was encouraging for the bulls to see equities bounce back nicely to close the week on Friday after Thursday’s Europe related drubbing. However, stocks sold off again on Monday as recession fears and European debt soured the mood. [Stock ETFs Fall]

Also of note was Friday’s sharp decline in the VIX, which fell from a $30 handle to close at $26.38. The VIX has bounced off its 200 day moving average which it is fast approaching, on two occasions since October as bears and portfolio hedgers have generally used declining levels of volatility in the marketplace to purchase puts and establish hedges with doubt that we will have any sustained equity rally.

On the flows side last week, financials saw bullish flows, with well over $500 million entering XLF via creations, and we also pointed out sizable call buying in the ETF during Thursday’s market sell-off, an indication that market participants were using weakness in the sector to accumulate shares.

Financials outpaced the broad market in the past week, up 1.38% versus the SPX rallying 0.94%. We would wager that the average investor does not realize that Warren Buffet’s BRK.B is the highest weighted name in XLF these days (9.12%), as the stock was not even in the S&P Financials Index say 4 or 5 years ago, as it was added amidst the post 2008 upheaval in the financials industry with many of the stalwart names vanishing from the landscape (think Lehman, Bear Stearns, Washington Mutual, Countrywide, and so on).

Wells Fargo, JP Morgan, Citigroup and Bank of America round out the top 5 weightings in XLF, so there is a clearly a large cap “bank” bias even though the sector ETF holds securities of insurance, capital markets, mortgage finance, and REIT focused companies.

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