Financial ETFs have been strong in 2013 but there are emerging technical signs the sector could see its relative performance edge begin to slip.

“During the last twelve months we have seen the financial sector, based on the Financials Select Sector ETF (NYSEArca: XLF), outpace the overall equity market (NYSEArca: SPY). This has been bullish for equities as traders shift into the perceived ‘higher risk’ sector as prices continued to rise,” says technical analyst Andrew Thrasher. “However, as of late XLF has been breaking down.”

XLF has posted a total return of 25.5% so far this year, versus a gain of 20.1% for SPY, according to Morningstar. [Top Sectors of 2013]

The financial sector has been solid the past year although XLF remains well below its 2007 peak.

The recent rotation out of financials is a warning sign for the market, according to DynamicHedge.

“After months of outperforming the SPY, the XLF is displaying considerable weakness in relative terms,” according to the blog. “Not long ago the headlines trumpeted the return of banks thanks to stellar earnings reports. The problem is that the headlines were met with weak price action. The question is: which sector will take its place and do we need a market shakeout to shuffle the deck before something else emerges?”

Chart source: Andrew Thrasher

Chart source: David Wilson, Bloomberg

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.

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