The S&P 500 & the Financial Sector May Have Been Naughty This Year

Market pundits and prognosticators are all worried as to whether Santa is going to deliver presents to Wall Street this year. While we have seen the S&P 500 reach new highs in December, the S&P 500 is facing a wall of resistance around the S&P 1250 area. Based on price action today, Santa may not be coming to Wall Street in 2010.

Market participants are aware that the holiday season tends to usher in light volume and declining volatility historically. When volume is light and volatility is declining there is generally a bias to the upside as equities typically grind their way higher. In the recent past, Santa has come to Wall Street and delivered gifts of good fortune to those that were heavily invested in the domestic financial markets.

Unfortunately Santa may not deliver presents to Wall Street this year as apparently one sector in particular has behaved poorly. If the financial sector does not start behaving, Santa may not come to Wall Street at all in 2010. Apparently Santa and Mr. Market are good friends as they both like to watch the financial sector closely.

The action in the KBW Banking Index (BKX) recently has not been inspiring. In fact, the action suggests that the financial sector may potentially be putting in an intermediate to longer term top. Before coming to any conclusions, we need to watch the price action in the financial sector play out before jumping in on either side. As Minyanville founder Todd Harrison often writes, “as go the piggies, so goes the poke.”

Essentially what he is saying is that without the banks participating in a rally, the broader market will have limited upside. If the banks are sold heavily, the broader market is likely to follow. As can be seen from the chart illustrated below, the BKX tested recent highs and has failed on its first attempt to breakout. As most traders are already aware, every time a level is tested it becomes weaker so we will be watching to see if this level is tested again in the near future. Illustrated below is the daily chart of the BKX banking index: