This Sector Should Lead the S&P 500 to New Highs

by Sam Collins | January 22, 2014 2:20 am

The major indices turned in another flat performance Tuesday, as the latest earnings from Dow stocks failed to rally the market despite beating analysts’ estimates.

Those components that closed lower after announcing earnings were Johnson & Johnson (JNJ[1]), Travelers (TRV[2]) and Verizon (VZ[3]). IBM (IBM[4]) lost 0.9% ahead of its earnings release, which was due after the close.

But the Dow transports got a boost from Delta Air Lines (DAL[5]), which rose 3.3% following a strong earnings report.

The Wall Street Journal reported that the Federal Reserve is on track to trim its bond-buying program for the second time in six weeks. But the news seems built into both the bond and stock markets’ structure according to the article.

At Tuesday’s close, the Dow Jones Industrial Average was off 44 points at 16,414, the S&P 500 rose 5 points to 1,844, and the Nasdaq was up 28 points at 4,226. The NYSE traded total volume of 3.7 billion shares, and the Nasdaq crossed 2 billion shares. Advancers outpaced decliners by about 1.7-to-1 on both exchanges. The lower volume was attributed to the early exit of New Yorkers due to a snowstorm that is hitting the Northeast.

SPX Chart
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Chart Key[6]

Tuesday’s intraday high was 1,849.31. Although the S&P 500 has not yet broken the intraday high at 1,850.84, made on Jan. 15, it broke above the four-day flag, and that is a bullish development.

XLF Chart - Weekly
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The weekly chart of the Financial Select Sector SPDR (XLF[7]) shows a long-term bull market that has hardly wavered since March 2012, and this is a major supporting sector for the S&P 500.

XLF Chart - Daily
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Following a mild correction last summer, XLF formed a new bull channel that is supported by heavy accumulation.

Conclusion: Buyers have been pounding against the S&P 500’s barrier at 1,850 for months. And they will probably soon be successful in piercing it. Breaking from the small flag shown on the chart is a positive development, and no amount of sellers can supply stock for an indefinite period.

The financial sector has given the S&P 500 a solid floor of support throughout the advance since mid-2012. And the sector now appears to be picking up more buyers at the top of its range.

When XLF breaks to a new high, so too, should the S&P 500, and then the other sectors will likely follow. I have been recommending bank and financial stocks in the Trade of the Day[8] because they, along with technology stocks, should push the S&P 500 to new heights.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[9].

For a list of this week’s economic reports due out, click here[10].

  1. JNJ:
  2. TRV:
  3. VZ:
  4. IBM:
  5. DAL:
  6. [Image]:
  7. XLF:
  8. Trade of the Day:
  9. click here:
  10. click here:

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