A warning sign for the US stock market: the financial sector is down 6% this year, while the broader market keeps hitting new highs.

```

As the S&P 500 index repeatedly reaches historic highs, the persistent absence of a key sector is sending warning signals to the market.

The U.S. financial sector has fallen about 6% so far this year, while the S&P 500 has risen 7% during the same period, closing at all-time highs 14 times in the past 17 trading days. This rare divergence has raised concerns among some market participants—similar signals appeared before the bursting of the internet bubble and the onset of the 2008 financial crisis.

Scott Brown, founder of Brown Technical Insights, stated, "The U.S. stock market cannot function without the support of the financial sector. History shows that financial stocks at least need to participate in the rally, but currently, they're not even involved."

Concerns in the private credit market are considered one of the important reasons for the financial sector's pressure. Melissa Brown, Global Head of Investment Decision Research at SimCorp, points out that the financial system is highly interconnected, and the related risks "might spread more widely than currently expected," requiring close attention. Although major banks like JPMorgan, Bank of America, and Wells Fargo all reported strong quarterly earnings in April, the downward trend of the financial sector has not been reversed.

Technical Divergence: XLF Breaks Below the 200-Day Moving Average

Scott Brown notes that technical indicators in the financial sector are particularly worrying. The State Street Financial Select Sector SPDR ETF (XLF), which tracks the sector, has not only continued to decline during the S&P 500’s new highs, but has also remained below the 200-day moving average—which is widely seen as an important reference for long-term trends.

Historical data show that in the previous 32 times when the S&P 500 reached new highs while XLF was below the 200-day moving average, the S&P 500 fell 29 times one month later, with an average drop of 3.3%. Six months later, the S&P 500 fell 18 times and rose 14 times; a year later, it rose 17 times and fell 15 times, with an average gain of 4.6%, but the largest decline during the down periods was as much as 41.5%, highlighting asymmetrically higher downside risks.

In addition, among all 11 SPDR sector ETFs in the S&P 500, XLF is currently the only one whose price and 50-day moving average are both below the 200-day moving average, which means the financial sector is weak in both short and long-term trends.

The relative performance is also discouraging. According to FactSet and MarketWatch, since XLF was launched on December 22, 1998, its performance relative to the S&P 500 has fallen to its lowest level in history.

This means the current weakness of the financial sector relative to the broader market exceeds that during the COVID-19 shock and the 2008 financial crisis, and is far worse than the early days when the internet bubble burst in 2000. This extreme relative weakness has made some analysts uneasy.

Historical Precedent: The Financial Sector Has Warned Twice in Advance

The financial sector is regarded as a leading indicator due to its core role as a provider of economic liquidity. Companies need loans to expand their business, and banks profit from lending. Once credit conditions tighten or willingness to lend declines, both the economy and stock market tend to come under pressure.

Historically, the financial sector has twice issued warnings before the broader market peaked. Before the internet bubble burst, XLF’s performance relative to the S&P 500 started to weaken in April 1999, roughly 11 months before the S&P 500 finally peaked; ahead of the 2008 financial crisis, XLF sent warning signals from February 2007, about 8 months before the market top.

Faced with these signals, Scott Brown’s recommendation is to be cautious rather than aggressive. He noted that it is not easy to call a top in today’s market or turn bearish, because these warning signals may last for a long time before the market digests them, and they may not ultimately materialize.

However, he suggests investors may consider gradually "reducing chip stock holdings" rather than continuing to chase rallies, and should not add new funds to the market. JPMorgan CEO Jamie Dimon previously likened the private credit issues emerging at the end of last year to "cockroaches"—if you see one, there may be more out of sight—even though he also said the issue might not pose systemic risks, and the market’s reaction to the warning has been largely muted. But given the ongoing abnormal signals from the financial sector, the warning may warrant reconsideration.

Risk disclaimer and termsThe market carries risk, and investment requires caution. This article does not constitute personal investment advice, nor does it take into account the unique investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article fit their particular situation. If you invest accordingly, you do so at your own risk. ```