Why this sector could be a big risk to the rally
Financial stocks have begun to underperform the S&P 500, and some say that could be a big risk to the broader market rally.
"The reality is that financials, which are the biggest part of the market in many ways, and the second-biggest weight—they don't act well," Oppenheimer's chief market technician, Carter Worth, said. The sector "has been underperforming for five months, and that's a problem."
While the S&P 500 has risen 7.6 percent in the past five months, the SPDR Financial ETF (XLF) has only risen 3.8 percent. And even as the market continues to make all-time highs, key financial stocks like JPMorgan, Bank of America and Berkshire Hathaway haven't made fresh 52-week highs since July.
So are the financials predicting a turnover for the market as a whole?
Worth looked back 25 years to find every instance in which financials have underperformed the market for more than five consecutive months while the market itself was "in a bullish phase" (meaning, while the S&P was 5 percent or higher above its 150-day moving average) as it is now.
He found that in the 30 situations that fit both criteria, the market tended to drop 0.53 percent in the ensuing two-months.
Now, a decline of half a percent might not sound terrible, But it is much worse than the average two-month return of 1.23 percent.
The underperformance in the financials, then, provides Worth another reason why "we remain sellers."
"As we get toward the end, possibly, of QE, and maybe a hint to it sometime in December, we could have some trouble in the markets," Nathan said on Friday's "Options Action." "And maybe the financials are telling us that."