Hated Sector That Deserves Some Love on a Pullback

Traders may want to make financials their go-to sector if we see a more meaningful correction

   

Hated Sector That Deserves Some Love on a Pullback

U.S. stocks had a wonderful start to 2012, and currently the S&P 500 is still up around 10% for the year. In Europe, however, things look much different. The Euro Stoxx 50 was up 12.5% at its best this year, and now is in the red, down 1.4% for the year.

While there are somewhat different dynamics at work in Europe, I would like to point out the historical spread between the S&P 500 and the Euro Stoxx 50 indexes.

 04 20 12 spx eurostoxx 501 300x214 Hated Sector That Deserves Some Love on a Pullback
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The middle of the chart shows that the spread is at historic highs, which either means the Euro Stoxx 50 has to rise in relation to the S&P 500, or the S&P 500 has to fall and catch up with the Euro Stoxx 50. 

At the bottom of the chart, also note the historic correlation of the two indices is always positive. There certainly is the off-chance that “this time it’s different,” but as traders we must focus on the higher probability setups and that means giving a mean-reversion trade such as this the benefit of the doubt.

04 20 12 spx daily 300x210 Hated Sector That Deserves Some Love on a Pullback
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On April 10, the S&P 500 held the uptrend dating back to the Oct. 4 low, and over the past few days continued retesting that very uptrend. The 50-day simple moving average has been useless as support and resistance, as I always point out to subscribers. Yet from a broader perspective, if the S&P 500 were to break below the macro uptrend, then 1,340 and 1,300 should be the next viable downside targets.

04 20 12 spx 60 min 300x210 Hated Sector That Deserves Some Love on a Pullback
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If we look at this a little closer on the S&P 500 15-day 60-minute chart, note that we have retraced 61.8% of the move from 1,422 down to the recent lows at 1,357. In addition, we are now seeing a bear flag formation that also has a first target at 1,340. 

04 20 12 sox 300x210 Hated Sector That Deserves Some Love on a Pullback
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The semiconductor complex as measured by the Philadelphia Semiconductor Index (SOX) put in a lower high, and by so doing, failed to confirm the higher high that the S&P 500 has given us. 

Of course, individual stocks such as Intel (NASDAQ:INTC) have done great this year, in line with the S&P 500 making new highs. Either way, a confirmation by the SOX would be one checked box that would make me feel more at ease if I were net long stocks at this juncture. 

04 20 12 xlf 300x210 Hated Sector That Deserves Some Love on a Pullback
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That brings us to the financials, which were the best-performing sector in the first quarter. Even after some profit-taking in individual names following their first-quarter earnings announcements, on the whole they remain healthy looking. Yet the sector is very much disliked even after having been on the bench for the better part of the past four years. If and when we get a more meaningful price correction  in U.S.equities this year, the financials remain my preferred go-to sector at such time.  

While the bears had a real chance to make a statement yesterday, they again gave in to the bulls who bought into the market during the last hour. Nevertheless, the above charts of the S&P 500 show that we are very close to potentially seeing 1,340. Should yesterday’s lows or thereabouts hold, we still have a shot at revisiting 1,420 and possibly above, but the bulls have to fight hard. 

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/daily-stock-market-news-a-hated-sector-that-deserves-some-love-on-a-pullback/.

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