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See How This Index Warned About the Sell-off

It failed to confirm new highs in the S&P 500 and DJIA

by Bob Stokes
Updated: December 26, 2018

As you'll recall, after some wild volatility in early 2018, the broad market mustered a rally from April to October. However, the financial sector generally did not participate in that rally.

Our Oct. 12 U.S. Short Term Update showed this chart and said:

FinancialFallHarder

After rising to meet the top line of its channel from the 2009 low on January 26 of this year, the NYSE Financial index made a lower high in September 20, failing to confirm the new high in the S&P 500 on September 21 and the new high in the DJIA on October 3. A plunge this week has drawn the financials down to more than a 14% decline from the peak. A contracting financial sector has often been a bearish harbinger for the market in general.

Sure enough, the market in general continued to tumble into December. Plus, the NYSE Financial index declined more than 11% through Dec. 21.

On that date, our U.S. Short Term Update showed this updated chart and said:

FinancialsLeadDec21

The Financial index is progressing toward the lower channel line, which crosses 6360-6370 through the first week in January. Prices are down 23% from the January 2018 peak. This week, the index closed below the June 2015 extreme, as shown by the horizontal line on the graph.

A weak financial sector is often a warning sign for the stock market as a whole, and that's how it played out in 2018.

Interestingly, CNBC reported (Dec. 23) that:

Treasury Secretary Steven Mnuchin held calls on Sunday [Dec. 23] with the heads of the six largest U.S. banks to shore up confidence in the U.S. financial system amid the recent market turmoil.

But, investor confidence is not derived from the words or actions of bankers.

Investor psychology unfolds according to its own pattern, which can be seen in stock market charts.

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