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February 27, 2006
Industrials, Finance and the Dow Diamonds
The Wall Street Journal Reports:
Financial stocks -- not energy stocks -- dominate the Standard & Poor's 500-stock index. Banks, stock brokers, insurance companies and the like make up 21% of the index's market value. Technology is next, followed by drug and other health-related stocks, according to data compiled by Birinyi Associates in Westport, Conn. Energy stocks, for all their gains, come in sixth, with 9%. And that is good news for the stock market, because financial stocks have longer coattails. When oil stocks are dominant, as they were in the 1970s, it is because oil prices are so high that other parts of the economy suffer. When financials are strong, it is because inflation and interest rates are low. That is great news for banks and insurance companies because it holds down their cost of obtaining funds. And low interest rates hold down costs and boost profits at most other companies, too. That is why investors love to see financials lead the market.
This chart shows the Finance SPDR (XLF) breaking diamond resistance over the last two weeks and the breakout is bullish until proven otherwise. The Finance sector is not only important for the S&P 500, but it also plays a key role in the Dow Industrials. AIG, AXP, C and JPM are key components in the Dow and the Finance SPDR (XLF).
In addition to XLF, the Industrials SPDR (XLI) broke diamond resistance this month.
Looking at the Dow Diamonds (DIA) pattern, it is clear that the Industrials and Finance sectors are quite important to the Dow. All three have similar patterns (diamond breakouts). The Finance and Industrials sectors should be watched closely for clues on Dow direction.
Posted by Arthur B. Hill at February 27, 2006 07:09 AM