Do Not Buy The Financial Sector Yet

The turmoil in the banking area attracts attention to the financial sector. The fact that prices have declined so much in a short period of time might lead investors to take advantage of lower prices. The cyclical approach tells us that it is too early to buy. The first view is that of the seasonal cycle. The chart below displays the annual seasonal trend for XLF
XLF
, the financial sector ETF. The April through June period tends to show little upside bias. In fact, from April 29^th to June 6^th of any year, this index has fallen 60% of the time. Price does not follow this pattern each year, but we can say that seasonality is a headwind for financial bulls.

XLF Monthly Histogram

There are many other cycles besides the one-year annual rhythm. Below we see the strongest monthly cycles displayed as one composite cycle. This cycle points to June as the next tradable low, likely late in the month.

Here is confirmation for the bears. Many of the stocks that comprise the XLF are hitting new one-year lows. Prior such situations have led to further weakness.

The weekly graph below is negative. Note that relative strength has broken down out of a rectangular formation. Rectangles are the most frequent and also the most reliable formations. This breakdown suggests another 6 to 7 months of relative underperformance.

XLF Weekly

There is one bright spot, and that is that the insiders are buying. However, any positive prior developments were not accompanied by bank foreclosures, so the current banking crisis is likely to negate any such positive developments.