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?

Gandee Vasan | Stone | Getty Images

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."

Dan Nathan of RiskReversal.com agrees with Worth's bearish take.

"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."

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

Follow the show on Twitter: @CNBCOptions.

Latest Video

Tutorials

Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

Options Action Traders

From Our Sponsor

Sign Up for Our Newsletter Options Action

Insight directly from the members of our Options Action panel
Get this delivered to your inbox, and more info about about our products and services.
By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.