As goes this sector, so goes the market? That’s what I believe. And no, I do NOT mean the wildly overloved, overowned, overvalued technology sector.
I’m talking about financials. I consider them great “leading indicators” for the broad averages. That’s because they’re incredibly sensitive to deterioration in the credit markets and because they have a solid track record of warning about problems in advance.
Consider what happened back in 2007, the peak of the last bull market. The Financial Select Sector SPDR Fund (XLF, Rated “B-”) topped out in late May. Other analysts didn’t pay enough attention. But I did.
Sure enough, the iShares Russell 2000 ETF (IWM, Rated “C+”) topped out several weeks later in early July. The Industrial Select Sector SPDR Fund (XLI, Rated “B-”) peaked at the beginning of October. Then the Technology Select Sector SPDR Fund (XLK, Rated “B”) started to roll over at the end of the month.
You don’t need me to tell you how devastating the subsequent declines were. But what you may not remember is this: The XLK didn’t recapture its peak for almost four and a half years, while the XLI didn’t get back to even for five and a half years. And the XLF? It STILL hasn’t done so 11 long years later!
With that in mind, take a look at this chart:
The red line shows the performance of the iShares MSCI Europe Financials ETF (EUFN, Rated “C”) over the past year or so. The yellow line shows the XLF. And the green line shows the Nasdaq Composite Index.
What should jump out at you right away? The crazy performance divergence between financials, both domestic and foreign, and everybody’s favorite tech darlings!
The EUFN was recently down 8% year-to-date. The XLF was off about 1%. But the Nasdaq was UP to the tune of more than 12%. That’s not a minor performance gap. It’s a chasm the size of the Grand Canyon!
This is the kind of thing that keeps me tossing and turning at night. It’s absolutely NOT what you want to see if you’re a raging stock market bull. Instead, it’s the kind of thing that foretells more volatility, more risk, and more need for protection.
So, if you don’t own them already, consider put options on vulnerable stocks, inverse ETFs on weak sectors, or another great “chaos insurance” play … gold!
Until next time,
Mike Larson
P.S. If you missed my presentation at the MoneyShow Las Vegas, you can access the archived video here. I will also be presenting at the upcoming San Francisco, Toronto, and Dallas events. You can find more information here. If those cities are more convenient to you. Hope to see you there!
