However, it's important to remember a basic point. Technical analysis is not an exact science. There is no guarantee the XLF will come back from its current levels like it has in the past. The fundamental background is very different this time. Financials have the misfortune of being involved in the structured finance business at a time when we have a fair amount of negative news in that sector. The WSJ has run a series of articles on the structured finance market that highlighted the concerns about the sector. Bear Stearns hedge fund problems drove the market lower last week and still hang over the market this week.
In addition, Bank of America comprises 8% of this ETF. BAC made a comment over the last two weeks that the recent mortgage problems were the tip of the iceberg. Merrill Lynch -- a Bear Stearns creditor is 2.79% of this ETF. Also remember the earnings season is about to start. As Barron's noted today:
WITH ANOTHER EARNINGS SEASON ABOUT to kick off, health care, technology, heavy industry, and even the fickle energy sector could be Corporate America's pennant winners.
Energy companies in particular could hit a big homerun off rising oil prices and low expectations in the second quarter.
"The rationale here is that earnings growth leads stock prices," says Michael Thompson, director of research at Thomson Financial. "Stock prices reflect good earnings and these are places where you will find it."
If that's the case, some financial stocks might be best left on the bench right next to home builders, auto makers and several retailers.
In short -- there are alot of fundamental reasons for financials recent fall and for this index to underperform over the next few months.
