I write a lot about the importance of the financial group. Its performance is an excellent gauge of the health of the market and economy. There are two reasons I give the financial industry a lot of credence. First, the financial group is currently the largest industry component of the S&P 500 (SPX.X). The financials account for just under 18 percent of the index. Second, the financials, both banks and brokers, serve as the pulse of business activity. The banks obviously lend and the brokers underwrite and facilitate mergers and acquisitions.
The KBW Bank Sector Index (BKX.X), which includes money centers such as Citigroup (NYSE:C) and J.P. Morgan Chase (NYSE:JPM), is currently trading in a column of Os on its relative strength chart versus the S&P 500. A portion of the BKX's weakness is attributable to the credit concerns surrounding J.P. Morgan and the implications on its shares. The BKX remains on a buy signal on its relative strength chart versus the S&P 500, but has been unable to make progress to the upside.
BKX.X versus SPX.X
The brokers, as measured by the AMEX Securities Broker/Dealer Index (XBD.X), trade heavy, too. For some reason, the XBD.X has been unable to break above the 47.00 level on its relative strength chart versus the S&P 500. That level has capped the upside in the brokers for about 18 months in terms of relative strength.
XBD.X versus SPX.X
The BKX continues to trade as if it's under distribution. Since breaking its triple-bottom at 850.00 in late January, the BKX has traced a pattern of sequentially lower highs and lows. The index reversed back into a column of Os in today's session with the print below 815. A buy signal would come on an advance past the 835.00 level at this point in the pattern.
BKX.X - P&F
The XBD also broke a key support level in late January and hasn't given a buy signal since. The index came close with its advance up to the 500.00 level in today's session, but has not yet been able to generate the buy signal, which would come on a print at 505.00. Like its relative strength versus the S&P 500, the XBD appears at an inflection point in terms of supply and demand.
XBD.X - P&F
The recent rebound across the market has placed the financial group back near meaningful levels of resistance as well as levels of relative strength. Without participation from the financials, the major market averages are unlikely to advance past their respective resistance levels. For example, the 1125 to 1130 level in the S&P 500 has been established as a meaningful point of conflict between supply and demand. Without the necessary support from the financials, the S&P is unlikely to advance past that congestion.
On the other hand, a flip in the relative strength of the financials as well as new buy signals would most likely allow the broader market to push higher in this rally. Whether it happens on this leg remains to be seen. Bulls would gain an upper leg in the battle if the financials do see some improvement over the short-term.
The point and figure charts that appear in this piece were created using www.stockcharts.com.