Why this winning sector may be a bad idea

One of the best performing sectors in the market last week may not be the best investing idea.

The S&P 500's financial sector showed a 2.3 percent gain last week. But according to Ari Wald, head of technical analysis, only certain types of financial companies are worth buying. That is why he's not keen on the ETF that tracks the financial sector as a whole (trading under the ticker symbol XLF).

"I like financials selectively, but I don't think the XLF is the best way to play it," Wald said.

Though the XLF broke above a key resistance level last week and made new highs, Wald believes there are some signals the recent rally is not all in the sector as a whole.

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"Only a net 17 stocks of the 84 that are in the sector made a new 52-week high with it," Waldsaid. "So it's a very selective move, not broadlybased. A little bit of a closer look will show that the capital markets industry and the REITs industry were the big drivers of this trend. These are the industries that we want to buy."

Wald, however, is worried about the banks. "I think XLF has too much exposure to the banks," he said. "I would rather be a little more selective and concentrate on the industries rather than the sector."

Gina Sanchez, founder of Chantico Global, is on the same page as Wald when it comes to the XLF's exposure to banks.

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Banks make up about 36 percent of the XLF's holdings. "That's a huge driver of how it will do," said Sanchez, a CNBC contributor. "To the extent that we don't have a constructive view on banks, it's hard to get really excited about the XLF."

Though banks have had good earnings results in the second quarter of 2014, Sanchez thinks that already has been priced into the stocks.

"Performance has really been bid up over the last several months," Sanchez said. "At this point you're looking for even more performance than they've already given, and I'm not sure that's possible. So if you have a bad view on banks, you probably don't have a great view on XLF."

To see the full discussion on the XLF, with Wald on the technicals and Sanchez on the fundamentals, watch the above video.

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