[Chart Of The Week] The Most Important Sector In The World Today

JC Parets
May 9, 2016

When we talk about the most important developments in the world today, we need to define who we are and why this is the case for us. We are market participants who have only one goal: to make money in the market. There are many others out there who are very loud, but are not here to make money in the market. Instead, they get paid to sell banner ads and tv commercials. This is the group that tends to lag price and prefers to focus on what is in the "news". Since price leads the news, these headlines and conversations typically show up well after the fact.

I think today we have a great example of this scenario and very clear conflict of interest.

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The bullish case for stocks (U.S. and abroad) starts with the banks. If we can't get financials going, it's going to be very difficult for stocks as an asset to head higher. Within the financial sector, it's the European Banks that are the worst of the worst. While the sell-off we've seen for the past couple of years has tried to stabilize since February, allowing markets to temporarily head higher, the consolidation in European Banks seems very continuation in nature.

Here is a chart of the MSCI European Financials Index ETF $EUFN. We are seeing prices falling from the upper of these two converging uptrend lines over the past few months. I would argue that if we're below the uptrend line from the February lows, this is the continuation pattern camp and prices are likely heading much lower:

5-9-2016 12-55-50 PM eufn

In this chart, I included a downward sloping 200 day moving average. With prices below this downward sloping smoothing mechansim, it is very difficult to argue this is any kind of uptrend. Also, momentum is plotted down below and notice how it did not reach overbought conditions on any of these rallies. This behavior is very characteristic of a downtrend.

Moving forward, only price pays. If this consolidation resolves lower, which I think is the higher probability outcome, it looks like stocks as an asset class will follow this to the downside.

At that point, I'm sure the headlines about European banks will resurface and the panic will ensue. By then we will likely be covering short positions. We saw similar behavior for non-market participants in late January.

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Tags: $EUFN

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