There is no arguing that the markets are stronger than ever and anyone who is bearish cannot be a happy camper. Like the 2000 market, every market investor that buys at any point currently has a profit. This type of market attracts everyone into it and leaves the rest to try and guess the top.
An old Wall Street sayings is, "Where the financials go, so goes the market." This phrase is intended to remind investors that the S&P 500 is made up of over 30% financial stocks. Any review of a chart will show that the Financial (NYSE: XLF) stocks tend to move with the markets. Sure, there can be a few days here and there where the XLF may deviate, but overall it tracks in lockstep.
When a trader notices a divergence in the XLF compared to the S&P 500, though, this can be a sign of problems. Looking back over the last few weeks. one will notice that the S&P 500 continues to push to new highs seemingly everyday. But take a look at the XLF: for the past two weeks it has not really moved at all, and finds itself below the all-time highs set back in October. The financials refuse to participate in this market rally...for now.
So what does this mean for you? Well, for now it's something to keep an eye on. As the S&P 500 is only pushing ahead by a point or two, it is hard to argue a huge divergence. If, however, the S&P 500 starts to extend itself in the short term, and the financials do not recover, you can bet that every short-term, technical trader will be calling for at least a temporary top in the markets.
These types of divergences have happened in the past and will likely happen again. They are best served as a possible alert that you may want to be ready. If the financials recover and start to grind higher, then there is likely no need to be concerned.