Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Are Stocks Basing or Topping Out?

|Includes:iShares NYSE 100 ETF (NY), XLF

 

The chart above shows the relative performance of the NYSE Financial Index as compared to the NYSE Composite Index. As you can see, financials have been lagging the broader market since late summer/early fall last year and a clear pennant has formed since then.

 

Stocks like Citigroup, Bank of America, Wells Fargo and JP Morgan have essentially flattened out and gone nowhere after running up out of the spring 2009 bottom. Either this has been a consolidation phase before the next leg up or bank stocks are going to test those 2009 lows again fairly soon.

 

I think this chart is the best technical indicator of which scenario we should expect. Should the ratio break down and make a lower low I wouldn't want to own a financial stock over the next few months. Should it break higher it may suggest that bank stocks are once again ready to play the positive leadership role they did last spring/summer.

 

At this point, I think the latter is the more likely of the two (pennants are typically continuation patterns and fundamentals have improved dramatically over the past year) but for now I'm willing to wait and let the chart tell the tale. 

Disclosure: none
Stocks: NY, XLF