Technical analysts are pointing to the recent underperformance of financial stocks and bearish options activity in the sector as potential warning signs for the overall market.
Financial Select Sector SPDR (NYSEArca: XLF) is up 24% this year to outpace the S&P 500. However, XLF’s performance edge has been slipping since July.
“Financials have been underperforming since July 23. With the loss of their leadership, it is another reason as to why this market will struggle to go higher,” says Tarquin Coe, technical analyst at Investors Intelligence.
“The ratio of the SPDR Financial (XLF) ETF versus the S&P 500 has pulled back to its 200-day exponential moving average, the last test being one year ago. Over the next few sessions it will become clear as to whether support is found there,” he wrote in a newsletter Wednesday. “If support is not found, then we would look for underperformance to extend down to lower channel support (as highlighted on the chart). If that level were to fail, it would signify that the system is once again under threat.”