After speaking about the XBD to several people the past two days it dawned on me that there may be a misconception about what the components of this index are.  As the name of the index indicates, it focuses on broker/dealers…and that does not include banks like JPMorgan for example.  

For starters, here are the components and weighting as of May 4th:

Interactive Brokers Group Inc – 9.92%

Nomura Holdings, Inc. – 9.42%

Knight Capital – 9.32%

E*TRADE Financial Corp – 9.31%

Ameriprise Financial Inc – 9.01%

Goldman Sachs Group – 8.96%

Jefferies Group – 8.95%

Raymond James – 8.83%

Charles Schwab Corp – 8.82%

TD Ameritrade Holding Corp – 8.80%

Morgan Stanley – 8.64%

 

On Tuesday I posted a blog entry about the potential for the financials such as JPM, BAC, USB and others, including the XLF etf to rally.  See here: http://steadytrader.wpengine.com/financials-outperforming-so-far-today-setting-up-for-a-trade/

Back to the XBD.  On the weekly chart the stock has retraced 50% of the move from the lows of 2010 to the highs in February 2011.  

The daily chart reveals resistance at the 50 day moving average (yellow line) and the April highs near $123.  Should XBD rally through these two levels to the upside I could see a run at the February 2011 highs at $130 developing.  Alternatively, should XBD break below $115,  lower levels down to $110 further could be tested.

While I think the S&P 500 can rally without the participation of the financials, participation of them would certainly help another run higher in equities.  Both the banks and other financials such as the broker/dealers as a group look to have potential to rally further.  

More importantly however, the financials could give us clues whether the cyclical bull market has much further to go.  If financials turn on their backs here and the broader tape rallies, that would be a divergence of telling proportions and likely a signal that the cyclial bull is at the very least running out of steam.  If the financials start to rally we could conclude that the much (too much?) talked about S&P 500 inverse head and shoulders pattern target of around $1430 may be in play.  

Happy Trading

Serge

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