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Tuesday, April 10, 2007

Cautionary Note

The first chart shows SPX vs XLF (representing the Financial sector) and the second chart shows SPX vs RUT (representing the small caps.

The XLF is highly correlated to SPX, as you can see from the chart above. And I personally use the financial sector as a market leader and a gauge to whether a move in the market is broad-based or not. Notice the XLF has been flat while SPX rally in April. This rally has not been broad-based and volume has been light. This is the time to exercise caution especially if you are long a stock or have a call position. I'm not saying the markets will turn bearish for sure, but the odds are it will be much harder for the market to move higher without support from the financial sector. There is a higher probability it will move down than up. The small caps are also facing some resistance while the SPX glide along.

For now, the charts are telling me to exercise caution and its not a good time to position for call options. But who knows, maybe the picture will change in the next few days with earnings kicking in and the FOMC minutes out on Wed.


Anonymous ricochettrader said...

Nice post on using XLF as a market leader gauge! Quick question if you will indulge. Given a stock how do you compare it against the other stocks within the sector, etc.? ie. which website and process do you use. Thanks!

10:38 AM  
Blogger Simply Options Trader said...

Prophet.net has a section on industry rankings. You are able to see the charts of all the stock in that sector. Or you could use Google Finance or Yahoo Finance to find stocks in a sector. The chart I use for comparison here is from Yahoo Finance. You can key in the ticker you have in mind and compare it with the relevant sector. Then you can see if this stock is outperforming the sector or lagging. If it is outperforming,you can consider it as a long candidate and apply further studies e.g technical analysis to determine a good entry point. Hope this helps

3:09 PM  
Anonymous ricochettrader said...

ok thxs that does indeed help a lot!

10:54 PM  

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