Equity mutual funds recently saw their largest weekly inflows since 2000 and the CBOE Volatility Index has dropped to its lowest level in about five years. Sentiment is turning more bullish on the market and the S&P 500 is approaching its all-time high.

At this critical juncture, investors should keep a close eye on two sectors that are often leading indicators for the overall market: financial stocks and emerging markets. If they continue to show relative strength then it’s likely the S&P 500 will break out to new record levels. [Investors Bullish on Stock ETFs]

“The S&P 500 continues to probe the resistance zone drawn across from the 2012 highs,” says Tarquin Coe, technical analyst at Investors Intelligence.

ETFs for financials and the emerging markets offer clues as to general market direction, he wrote in a note.

“Both areas have provided leadership during the recent equity rally. Should these leaders weaken, then the rest of the market may follow suit,” Coe said.

Financial ETFs

Financial ETFs were standout performers last year, and a slew of big bank earnings this week could set the pace for the first quarter.

“So goes the banks so goes the broad market … it has worked that way for years, so keep this important sector in mind for the macro picture,” Kimble Charting Solutions said in a note last week.

“It’s a make or break week for the financial sector with five of six of the nation’s largest banks scheduled to report fourth-quarter earnings results,” Yahoo Finance reports. “Bank stocks have seen strong gains ahead of these key earnings reports … Earnings expectations for the group are relatively strong.”

JP Morgan (NYSE: JPM), Goldman Sachs (NYSE: GS), Citigroup (NYSE: C), Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) are scheduled to report quarterly earnings this week.

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