Stock market trends are the strongest when the technology and financial sectors are moving in the same direction. If banks and technology stocks are both moving higher, then the bull is likely to keep charging. And, if the two sectors are both moving lower, then the bear is firmly in control.
But, the best opportunity to trade is when technology stocks are moving one way, and the financial sector is going in the other direction.
Consider, for example, the current situation…
For the past three months, the technology sector has been on fire. The Technology Select Sector Fund (XLK) is up more than 25% since mid-May.
Meanwhile, the financial sector is having trouble. The Financial Select Sector Fund (XLF) is trading at the same level it was at in mid-April.
The difference in the performance between these two leading sectors is as large as it’s been since the dot-com bubble burst way back in March of 2000.
To get an idea of just how significant this is, take a look at the following ratio chart comparing the performance of XLK and XLF…
This is a ratio chart that shows the share price of XLK divided by XLF. It’s not complicated. All it means is that as the chart moves higher, XLK is outperforming XLF. And, when the chart moves lower, XLF is doing better than XLK.
For most of the past 11 years or so, this chart has remained fairly steady between about 2 and 2.50. This consistency meant that XLK and XLF were generally moving in the same direction.
But, you can see since the start of 2020, the chart has moved sharply higher – meaning XLK is far outperforming XLF. In fact, we’ve now reached the point where the difference between the two sectors is even greater than it was in 2000.
Investors are chasing tech stocks higher, and paying premium valuations to do so. And, they’re selling the financial stocks while they’re trading at their cheapest valuations in years.
That’s an unusual situation, and it’s not sustainable. There are only a few things that can happen from here to bring this ratio chart back to “normal” – either the technology sector needs to decline, or the financial sector needs to rally. Or, we could get a combination of those two events.
My bet is we get a combination. I’m looking for technology stocks to decline in the coming months, while the financial stocks rally.
Best regards and good trading,
P.S. I’ve been following this trend closely for the past few weeks. And, I’ve come up with a way for everyday folks to get exposure to both sides of this trade – profiting on the upside in financials AND the downside in tech…
In short, I use options. And, if options sound scary to you, my options advisory service, Jeff Clark Trader, is designed for novice and seasoned traders alike. In it, I’ll show you how to use my low-risk strategy to yield high rewards trading options on just three stocks… two of them being XLF and XLK. (Click here to learn what the third one is.)
When you become a Jeff Clark Trader member, you’ll have access to my 8-part video series, quarterly Q&A sessions with me, all of my special reports, and a monthly trade recommendation… for just $19 per year.
How are you taking advantage of the tech and financial sectors, currently? We’d love to know. Send us your comments – and any questions – to [email protected].