We’ve been following the financial sector throughout the entire “reflation rally”, figuring that a breakdown in financial stocks may precede a breakdown in the broader market.  Financials led the way down in 2007, and they led the way up in 2009 – so can they threepeat and lead the way down once again here in 2010?

It looks like we’re about to find out.  The Financial Select Sector SPDR ETF (NYSE:XLF), which is a fund comprised of America’s leading financial stocks, is breaking down, observes our friend Brian Hunt in his always-excellent Market Notes column:

The Euro’s Demise Has Been Set in Motion: Are you protected?

"Nationalism will emerge. Healthier countries will not see fit to spend their hard earned money to bail out their less responsible neighbors."

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We monitor (NYSE:XLF) because it’s one of the largest and most diversified ways to take a position in American financial stocks. Major weightings in the fund include Wells Fargo, Bank of America, Goldman Sachs, and JPMorgan. These are the companies that rise and fall with America’s ability to earn money, pay off debts, start new businesses, and just generally “get along.”

 

(NYSE:XLF) enjoyed a huge rebound off its March 2009 panic lows… soaring from $6 per share to $15 as investors flocked to positions that benefit from a stronger economy. But as you can see from today’s chart, this rally stalled in October 2009… and has traded in a huge sideways pattern for about a year. Just this week, the fund closed at a new 52-week low of $13.51 per share.

If this new weakness leads the (NYSE:XLF) into a downtrend toward $11 per share, call us darn skeptical about any positive economic claims you hear from the White House or CNBC. The market knows a thousand times more than they ever will… But if the (NYSE:XLF) does manage to pick itself up off this floor and hit a new 52-week high, count us among the optimists.

(Source: DailyWealth.com)

Written By Brett Owens From Contrary Investing

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