Punching a Hole in the Ceiling

The key metric in the market since last week has been the breaching of the psychologically and technically significant 1,100 mark on the S&P 500 Index. The index managed to punch a hole in this ceiling on its way to a new, 52-week high.

As you can see by the chart below of SPX, this broad market index has been on a tear ever since March. That tear has been nearly uninterrupted since the index bounced off of its 200-day moving average (red line) in early July.

The S&P 500 now trades firmly above that long-term moving average, but it also now trades well above its short-term, 50-day moving average (blue line). This is clearly a bullish sign for SPX and, because of this, I do think it’s safe to put money to work in this market. But if you are going to do so, be certain you have a tight stop loss in place to protect your gains if the market comes rolling back.

Now, one sector that hasn’t quite punched through that upper end of technical resistance is financials. If we look at the chart below of the Financial Select Sector SPDR (XLF), we see this fund is now trading right at its 50-day moving average. 

This failure to trade at new highs along with the SPX is significant, because financial stocks were the ones that led this rally back from the March brink. Bargain buying in the severely battered sector helped the wider markets recover and, if we see this sector start to lag, it could be an indication that the remarkable 2009 bull run finally is losing steam. 

We aren’t there yet, but if we start to see financial stocks wane, it could be the harbinger of things to come for the rest of the market.