The stock market has continued to press higher this week and many sectors have been performing very well alongside the general indexes. However, not all sectors are participating, and in fact, one critical group is clearly lagging the markets. The financials have been weak over the past few weeks and are showing a clear divergence from the major indexes.
Notice that while the S&P 500 and Dow Jones Industrial Average are trading at new highs, the SPDR Select Financial Sector Fund (NYSE:XLF), which represents the financial sector, has not been able to muster up the strength to clear even its April highs. The chart doesn't look terrible overall, but the negative divergence is certainly worth noting.

Source: StockCharts.com

One of the reasons for this divergence is the underperformance in stocks like Morgan Stanley (NYSE:MS). MS looked great as recently as a few months ago when it cleared a base in early January. MS followed through and rallied up to the $31 level before a gap-down reversal. Typically, a stock will find support on the first pullback from new highs at its prior breakout area, and while MS did pause near $27, it eventually caved in. MS is now back under its 200-day moving average in stark contrast to the major indexes. (For more, see Playing The Gap.)

Source: StockCharts.com

Another stock that has been lagging is Goldman Sachs Group (NYSE:GS ). GS has been considered the leader in this group for several years, but it too is having a hard time making any progress. GS cleared the $155 level last October and appeared to have finally shaken off some of the weakness that dogged it for a large part of 2010. However, GS recently broke down under this level on a surge in volume. With an unfilled gap just above it, this level will be a key one to watch moving forward.

Source: StockCharts.com

Much like XLF, the chart for JP Morgan Chase & Co. (NYSE:JPM) doesn't look all that bad in a vacuum. JPM has held its breakout from earlier this year and has respected the $44 level on the last two pullbacks. However, when taken in context, JPM is also still off its highs at a time when a large portion of stocks are trading at new highs. (For more, see Support And Resistance Basics.)

Source: StockCharts.com

The Bottom Line
While there can certainly be a rally without participation from the banks, a truly healthy bull market will eventually need this group to tag along. The banks are an early cycle group and their health corresponds directly to an improving economy where money is being loaned to businesses. Until they get in gear, the markets will be in more of a recovery than a bull phase.

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  2. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  3. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  4. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  5. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  6. Budgeting

    5 Alternatives to Traditional Health Insurance

    Discover five of the most popular alternatives to traditional health insurance plans, alternatives that are increasingly popular as health insurance costs rise.
  7. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  8. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  9. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  10. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center