Monday, June 8, 2009

Banks, Large Cap Tech and Leadership

One month ago today in The Banks vs. Technology, I mentioned the divergence between technology and financials and noted, “so far the financials (XLF) have done a better job of leading the market up than technology stocks (XLK) have done of inspiring the bears.”

Fast forward one month and the divergence has turned upside down. In the chart below, I focus on financials in the form of the KBE banking ETF and large cap technology as exemplified by the NASDAQ-100 or NDX.

As it turns out, May 8th, the day of the original post, was the top in the banking ETF. Since that date, banks have slowly trended lower (top graphic), even while large cap technology (middle graphic) and the S&P 500 index (gray area chart at bottom) have been making new highs. The change in leadership is perhaps best illustrated by the solid black line in the bottom portion of the chart, which tracks a ratio of KBE to the NDX. In March, April and the early part of May, the ratio quite accurately mirrored the movement in the SPX.

During the course of the past four weeks, however, leadership flipped from banks to large cap technology and the ratio began to decline – all while the SPX continued to make new highs.

I find it particularly interesting that it is not just the relative performance of banks that has declined, but it is also becoming increasingly common for banks and technology to move in different directions on the same day. This has been the case today and has been true for five of the past six days.

I am not surprised to see leadership being passed from financials to large cap technology, but as I said a month ago, I do not expect the market to make any significant additional gains unless the two sectors are able to move up in unison.

[source: StockCharts]


DISCLAIMER: "VIX®" is a trademark of Chicago Board Options Exchange, Incorporated. Chicago Board Options Exchange, Incorporated is not affiliated with this website or this website's owner's or operators. CBOE assumes no responsibility for the accuracy or completeness or any other aspect of any content posted on this website by its operator or any third party. All content on this site is provided for informational and entertainment purposes only and is not intended as advice to buy or sell any securities. Stocks are difficult to trade; options are even harder. When it comes to VIX derivatives, don't fall into the trap of thinking that just because you can ride a horse, you can ride an alligator. Please do your own homework and accept full responsibility for any investment decisions you make. No content on this site can be used for commercial purposes without the prior written permission of the author. Copyright © 2007-2023 Bill Luby. All rights reserved.
Web Analytics