Lately there have been quite a few days when it looks as if the market is wearing ‘concrete shoes’ and will never be able to keep its head above water. Time and time again the financials look like those concrete shoes: financials plunge; the market follows.
In fact the performance of financials relative to the broader market has been weakening steadily since early October 2006, when the ratio of financials (XLF) to the S&P 500 index (SPX) peaked. The chart below tracks this ratio since the beginning of 2006 and shows how financials have pulled the broader market down. Additionally, the chart reveals that almost every temporary improvement in the ratio has been an excellent shorting opportunity.
The chart also demonstrates that temporary bottoms in the ratio have presented some tradeable though short-loved opportunities on the long side. This morning the XLF and the XLF:SPX ratio are once again making new lows. Eventually the ratio will find a bottom. If the patterns in this chart hold true to form, the bottom in the ratio will precede a bottom in the SPX.