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Financials Leading Market, but Watch for a Pullback


And just because they're leading doesn't mean that any and all of them can be bought. Look for winners that will do well if Financials continue to lead in 2012.

With improving technicals and a lion's share of the downside priced in, the financials are showing relative strength. And, although it is early in the new year, they are leading the market higher. No doubt, it is much too early to foresee the rest of 2012, but if this story has legs, it will provide support for the coming market pullback, as well as offer investment opportunity.

The chart below provides a percent-gain breakdown by sector for the first two weeks of the new year. And although it doesn't feel right to call the Financials a market leader, they are in fact leading, and have been since mid-December 2011. The Financials Select Sector (XLF) is up over 6% (compared in the chart below against Industrials (XLI), Energy (XLE), Technology (XLK), Healthcare (XLV), and Consumer Discretionary (XLY)).

Now be careful not to get carried away with this. There will be a pullback (and soon) and it will need to be played like any other investment (with a stop!). The near term chart with technical analysis overlay (see below) shows that a pullback to 13.20-13.35 would offer opportunity on the XLF (stops set depending on risk profile and type of investor – short- or long-term).

And this doesn't mean that any and all financials can be bought. Far from it. Do your homework and find winners that will do well if Financials continue to lead in 2012. And pay attention to support and resistance levels, as well as technical formations. Stocks like Goldman Sachs (GS) and Morgan Stanley (MS) have raced higher but are still caught in short term wedge formations. Citigroup (C) and Bank of America (BAC) have raced through near term resistance and into more important longer-term downtrend resistance. And stocks such as PNC Financial (PNC) have broken higher and shown relative strength. Note that PNC's 50-day moving average is about to break higher through its 200-day moving average, a bullish longer term signal.

Below is chart for the Regional Banks Index (BKX). It has been strong as well, but supports the notion for a market pullback as it is overbought and in need of digestion and consolidation.

Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market. His writings also appear on Minyanville's blog community.

Twitter: @andrewnyquist
No positions in stocks mentioned.

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