Disturbing Patterns in Financial ETFs

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert) -- Chartists often like to view sector performance relative to the S&P 500 via a price ratio. For instance, if you are interested in basic materials stock momentum, you might investigate XLB:SPY over a particular period of time.

In comparing price ratios for each of the nine largest sector ETFs on March 20, only two can be said to be gaining in relative strength: Technology and financials. Historically, when these two segments are leading the pack, bull markets tend to be in their earliest stages.

Great news, right? Well, not exactly.

Since the 2008 meltdown, leadership from the financial stock arena often marked the beginning of painful corrections. For instance, financials rallied to the forefront of the sector leader-board in May of 2009; shortly thereafter, financials plummeted and the rest of the market struggled with a 10% summertime selloff.

The pattern has actually repeated itself each successive year. Financial stocks were the darlings of 2010 up through April. Then they sank, leading the way for an economic soft patch and a six-month period of stock-market malaise.

Then we have 2011. The SPDR Sector Select Financials Fund ( XLF) peaked near 17.0 in March of 2011, before succumbing to a brutal drawdown of -35%. The rest of the 2011 stock market followed XLF down the rabbit hole with top-to-bottom declines ranging from 19%-25%.

I'd really like to believe that this time is different. Unfortunately, I feel there's something to this disturbing pattern.

For one thing, even though the large-cap U.S. benchmarks continue breaking out to multi-year highs, the number of new highs and lows over the past few months on the NYSE has been somewhat anemic. One would be more impressed by the S&P 500's "accomplishments," if we were witnessing an increasing number of stocks logging new highs. Unfortunately, market breadth is weak.

Secondly, the fast start to the year for all risk assets has been petering out. Emerging market stocks, European stocks, U.S. smaller-cap stocks, dividend stocks, energy, materials, industrials, health care each seems less willing to "go along" with Dow 13,000 and the S&P 500's 1400. Indeed, it may be the false prophet of U.S. financials that is actually carrying the popular indices, with a little help from Apple-mania.

This is not a bearish call. I let stop-limit loss orders and VIX volatility hedges protect against downside risk. This is the recognition of reality: A few key sectors and a few key indexes may not be able to ignore the drag of other risk assets for much longer. Something may have to give.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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