As the cause of the global financial crisis, the financial sector caught the brunt of the melt-down — falling 85% between 2007 and 2009 versus SPX’s mere 57%.
Since bottoming in Mar 2009, it has continued to move in exaggerated fashion relative to sectors receiving lesser freebies from its servants on Capitol Hill and Constitution Avenue. In major rallies, XLF has averaged 1.44X the size of equivalent SPX rallies. Its declines have averaged 1.34X SPX’s.
In important declines, it has led SPX more often than not — putting in a top 4 1/2 months before SPX in 2007 and 2 1/2 months in 2011. In important rallies, it has launched in unison with SPX.
Like SPX, it has ignored some of the normally influential patterns of the past several years. Access to
cheap free money has trumped the valuation disasters lurking on balance sheets of companies that are legally exempted from accurate reporting.
So, it’s with some trepidation that I point out a few approaching trip wires.
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