The final Volcker Rule isn't the "Volcker Rule," according to
Paul Volcker himself, but he is happy with its balance between
rules and principles.
The latest response by regulators to tighten their grip on Wall
Street was completed this week, and the 71 page rule book along
with 850 pages of legalese has finally been put into
But does it really matter to financial stocks and their share
The Reality of the Situation
Dodd Frank was enacted in July of 2010 with a backdrop
of negative sentiment for financial stocks. But it had a
surprisingly positive effect on the banks share prices, so should
the latest Volcker Rule be any different? The Dodd Frank Act
helped mark the stock market's lows for 2010 when the S&P
500 traded as low as $1011, offering up a wonderful buying
opportunity for financial shares such as JP Morgan (
A rising tide lifts all boats the saying goes, and
financials have, like the rest of the stock market in
2013, responded to all news, good or bad, by
rising. According to Bloomberg, the 2013 rally is the broadest
on record as 447 of the 500 S&P stocks have risen.
Onerous rules or not, the market (thus
far) doesn't really care about any of these regulations.
As a result, relying on the ever changing regulatory
environment to help you decipher the market's next moves
likely won't help much.
This is why we utilize technical and sentiment analysis
alongside fundamentals to try to stay on the correct side of the
markets. So what exactly are the charts saying?
What the Tape Shows
Something happened in August 2013 that has not occurred since
financial stocks kicked off their admirable rally from June
2012. Financial stocks started to underperform the S&P
The chart below was provided for subscribers in our September
ETF Profit Strategy Newsletter and commented on the potential
breakdown of the financial sector. A few days later
Financials indeed broke down confirming they were no longer the
leaders of the market (NYSEARCA:SPY).
This means portfolio managers have likely been pressured to
shift out of financial stocks and into other, better performing
sectors, driving financial share prices down even further.
This indeed seems to be the case as the chart below is updated
through today and the larger section of the chart shows the
financial sector's underperformance continues through today.
In fact, only Utilities (NYSEARCA:XLU) have underperformed the
market by more since they both broke down this summer.
As discussed in our
September ETF Newsletter
, if XLF and one other very important sector both breakdown
together, it will be something that hasn't occurred since the rally
from 2009 started and will be a warning sign that the market
(NYSEARCA:VTI) is shifting out of its leaders and becoming more
defensive. This shift from leaders to defensive often
accompanies major market turning points.
Although financials are already underperforming the broader market,
thus far it hasn't meant an outright decline in their share
prices. And until joined by this one other sector, the longer
term price uptrends will likely remain intact. Luckily, we
have the tools to warn us when these changes in the market occur.
For now underweighting financials (NYSEARCA:XLF)
and staying long the broader market (NYSEARCA:SPY) is one
way to take advantage of a lagging financial
sector. Aggressively shorting financials isn't the
right call yet, however, the relative weakness of financials
compared to the broader market suggests that time is likely
A breakdown in XLF's technicals will suggest a decline in
financial stock prices is underway and a clear opportunity for
bears. On the other hand, if you are expecting the latest
Vocker Rule to rattle financial stocks, like what occurred when
Dodd Frank was passed, waiting for confirmation first is a better
way to play a market with a tide that is lifting all boats.
Profit Strategy Newsletter
and Technical Forecast follow the major ETF asset classes and
sectors in search of high probability profit opportunities like the
one setting up in the financials. We use fundamental,
technical, and sentiment analysis to stay ahead of the major market
trends with updates to our subscribers when those opportunities
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