Financial stocks led the broad stock market higher in July.
We figured that might be the case. It was almost exactly one month ago when the Financial Select Sector ETF (XLF) closed below its lower Bollinger Band – signaling an oversold condition.
We looked at that as a bullish setup for the financial sector. And since financial stocks tend to lead the broad stock market, what’s good for XLF was good for the S&P 500.
Sure enough, XLF gained a little more than 5% during July. The S&P 500 gained just about 4%.
Heading into August, though, the financial sector might just be offering a different view.
The S&P 500 had a strong day yesterday – closing up almost 14 points, or about 0.5%. Meanwhile, XLF ended the day lower by 0.7%.
Of course, we probably shouldn’t read too much into just one day’s worth of action. But the weakness in XLF is coming at a time that should be bullish for financial stocks.
You see, the Federal Open Market Committee (FOMC) is set to make an announcement on its interest rate policy later today. Nobody is expecting the Fed to hike rates today. But just about everyone expects another 0.25% hike in September. Today’s FOMC statement should confirm that expectation.
And since higher interest rates are generally seen as bullish for financial stocks, the financial sector should have been leading the market higher yesterday.
But it didn’t. XLF fell while the broad stock market rallied. This sort of divergence may be an early warning signal that the summertime stock market rally is nearing an end.
Take a look at this updated chart of XLF…
XLF rallied all the way up to the resistance of its May high. Then it pulled back.
This pullback is either a chance for XLF to consolidate the July rally and build up some energy for an attempt to break out to a higher level, or it’s the start of a reversal lower that marks the end of the recent rally phase.
We’ll likely know which direction XLF is headed based on its action following the FOMC announcement today.
If XLF turns back up and can break above resistance at about $28.15 per share, then the rally has farther to run. That would be bullish for the broad stock market for August.
On the other hand, if XLF sells off later today, and especially if it drops below $27.50 on any decline, then the rally in financial stocks is over. And that would be bearish for the broad stock market this month.
So, keep an eye on XLF today. Just as it did in July, XLF should give us a good idea of how the market will behave in August.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Today, a Delta Report subscriber makes a call for the short-term…
I was able to make 14% gain in two hours today on SPY calls (expiring next week) thanks to your Delta Direct market updates.
Jeff, regarding the 15- and 30-minute charts being oversold… They seem to suggest a short bounce today and/or tomorrow, while longer-term charts suggest more downside in the days to come.
It wasn’t a lot of money, but it’s a win when it’s hard to make money today with little market movement. Looking forward in the coming days for your continued insight as to what looks oversold or overbought and ready to reverse course.
– Tim
And in response to yesterday’s Minute, a reader shares their own horror story…
Jeff, I definitely enjoy your thought-provoking dailies. Monday’s put/call chart comparison with the S&P was eye-opening. I note a particular comparison between the charts comparing the crossover points of daily vs. moving averages of the two charts. There’s some kind of indication there. Not sure what it is, but keep the mental provocations coming.
My story is that, during the last big run-up in gold/silver, I latched on to my own system of watching which out-of-the-money calls were moving up each day and buying the next level poised to move next. My account soared for several months with one home run after another and it was really working… until it didn’t.
I failed to see the market had turned and went all the way back to where I started – and then some! I lost so much money the brokerage reported that I’d taken money out of my IRA because someone there couldn’t figure how an IRA could go down so much, so quickly. That triggered an audit costing me even MORE money by my accountant who said, “Brokerages don’t make that kind of mistake!” Finally got a correction letter from the brokerage, but the damage was already done.
Anyway, thanks for your experienced insight. I’ve learned winning is a lot more fun than losing, and your daily guidance every day keeps me in a cautious mode.
– Dean
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