A key sector has been AWOL from the stock-market rally. Investors should be worried.

MW A key sector has been AWOL from the stock-market rally. Investors should be worried.

By Tomi Kilgore

The financial sector has been weak while the rest of the market rallies - something that happened before the last big bear markets

A falling financial sector at a time the S&P 500 is rallying is like a flashing yellow light for Wall Street.

Those looking to the soaring chip sector for guidance on when the stock market's march to record highs could end may be missing a warning sign from a key sector that has been flashing for months.

Of course, a flashing yellow light may never turn red. But when similar warnings preceded at least the two biggest bear markets in the past three decades, what the financial sector XX:SP500.40 has been saying should not be ignored.

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"We don't have bull markets in the U.S. without financials," said Scott Brown, founder of Brown Technical Insights. While the sector doesn't have to lead the way, history says that, at the least, they have to participate in rallies, according to Brown.

And over the past several months, they haven't even been participating. Melissa Brown, global head of investment-decision research at SimCorp, said worries about the health of the private-credit market certainly has a lot to do with it.

"We've got to watch this closely," she said. Given how "way interconnected" the financial system is, "it has the potential to spread more widely than we currently expect."

Wall Street seemed to look past JPMorgan Chase $(JPM)$ CEO Jamie Dimon's warning that the private-credit problems that surfaced late last year were like "cockroaches" - as in, if you see one, "there are probably more" - because Dimon also looked to assuage fears by saying the problems probably weren't systemic.

Still, despite strong earnings reports in April from top banks like JPMorgan, Bank of America (BAC) and Wells Fargo $(WFC)$, the State Street Financial Select Sector SPDR ETF XLF had lost 6% in 2026 through afternoon trading Thursday, while the S&P 500 SPX had advanced 7% and had closed at 10 record highs over the previous 17 sessions.

Brown said this weakness - as well as other technical signs accentuating how much the financial sector is underperforming - gives him reason for pause. He said that while new highs should always be respected, it wouldn't be wise to add new money to the market, much less chase the chip-sector rally.

Also read: The financial sector is sending some spooky technical signals about the stock market.

Divergence with the 200-DMA

One big issue Brown has with the SPDR financial ETF $(XLF)$ is that not only has it lost ground while the S&P 500 has reached record highs, but XLF has remained below its 200-day moving average, which many use as a guide to the long-term trend.

Before the current stretch, Brown said there were 32 times that the S&P 500 reached a record high while XLF was below its 200-DMA. One month after each of those times, the S&P 500 was lower 29 times, by an average of 3.3%.

Six months later, the S&P 500 was down 18 times and up 14 times, Brown noted. While the S&P 500 was up 17 times and down 15 times a year later, with an average gain of 4.6%, the range of gains was 3.5% to 31.9% while the range of losses was down 1.9% to down 41.5%, according to data Brown provided.

And currently, the XLF fund is the only one of 11 SPDR sector ETFs for which both the price and the 50-day moving average - a short-term trend gauge - are below the 200-day moving average.

It's all relative - or is it?

Another worrisome signal can be seen on a relative strength chart, which compares how XLF has performed relative to the S&P 500 rather than on price basis.

Looking back to the inception of the XLF fund on Dec. 22, 1998, the ETF has hit a record low relative to the S&P 500.

That means financials have been doing worse now relative to the S&P 500 than they did even during the COVID pandemic and the 2008 financial crisis - and way worse than they did just as the dot-com bubble popped in March 2000.

Financials have led the way before

The reason financials tend to be leading indicators is that they are the providers of liquidity for growth. Companies need to borrow money to grow their businesses to meet increasing demand, and banks are happy to lend so that they can make money.

If companies don't want to grow, or banks want to lend less because credit conditions get tighter, then the economy and, in all likelihood, the stock market are likely to suffer.

As the following charts show, the financial sector acted as a warning signal well before the rest of the market figured out what the problems were before both the dot-com bust and the 2008 financial crisis.

In the former case, XLF started falling relative to the S&P 500 in April 1999, about 11 months before the S&P 500 peaked.

And ahead of the financial crisis, the ETF started flashing yellow in February 2007, eight months before the market topped out.

So how should investors play the current warning signal?

As Brown put it, it's hard to call a top in the current market, and certainly difficult to turn bearish, because these warning bells can ring for a long time before the market catches on, if it does at all. Still, he suggested that investors perhaps start "scaling out of chips," rather than adding to their exposure.

-Tomi Kilgore

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May 07, 2026 18:09 ET (22:09 GMT)

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