We ourselves are guilty of viewing the markets with a bearish slant even though it hasn’t yet broken to new lows. Though there are bulls who are just as guilty of believing a bottom has been put in when the evidence to support that argument is murky at best. In reality, from a technical perspective, nothing has changed. The market is still range bound and has been for the better part of 4 weeks.
Similar to the 110 point range the S&P500 traded in from March thru July (1,250-1,360), SPX again finds itself channeling in a range of 110 points. Except this time it is from 1,120-1,230. SPX hasn’t gone above or below these levels since the week of August 8th, so we’re looking for clues as to the most probable next move, a breakout above this channel or below it. Yesterday we think we got a big one, the price action in the financial sector.
While the major domestic market indexes themselves were able to put in a higher low even after the initial sell off Monday, the financial sector was not as fortunate. Instead the financial sector, as represented by XLF, broke down to trade below its recent lows in the $12.50 region. Be it that the financial sector is so important to the overall strength of the market, this could be an ominous sign of things to come for the broader markets. It would however be bias of us not to point out the higher low and double bottom that leading sectors like consumer discretionary (XLY) and technology (XLK) were able to put in. Once again though, we view the financial sector as carrying more weight because in 2008 it was the first to go and it was also the first to go earlier this year (it topped in April while the rest of the market topped in May).
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