Readers of our daily piece in 2012 will note that we have pointed to relative strength leadership that has been present throughout the year in two U.S. equity sectors, Financials and Technology.

Financials, as measured by the popular Financial Select Sector SPDR (NYSEArca: XLF), is up 20.00% YTD versus the S&P 500 Index having rallied 14.89%, and in the trailing one year period, XLF is up an impressive 33.56% versus the S&P’s 26.98% rise.

However, in recent sessions, there are signs that Financial stocks are starting to give way as major equity indices have come off of their highs rather abruptly.

In the past five sessions, XLF has fallen 2.85% versus the S&P 500 Index declining 1.65% and unsurprisingly, “Inverse” ETFs in the Financials space have gathered momentum on increased trading volumes.

FAZ (Direxion Daily Financial Bear 3X), SKF (ProShares UltraShort Financials), SEF (ProShares Short Financials), KRS (ProShares Short KBW Regional Banking), and FINZ (ProShares UltraPro Short Financials) have mostly seen an uptick in activity recently, as hedgers and outright speculators bracing for additional potential weakness in the Financials equity space seem to be gravitating to these short/inverse funds. Some of these funds incorporate daily leverage, and thus are intended for short term trading as opposed to longer term investment holding periods.

However, going into the quarter’s end in coming days and with Financial stocks being one of the shining stars in the U.S. equity universe in 2012 in terms of performance, we may continue to see bearish/protective looking flows via leveraged/inverse Financials based ETFs especially if the broad market continues to give back recent gains.

Financial Select Sector SPDR

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