Is The Financials Sector Sending A Warning Signal Or A Rotation Signal?

1.)  FINANCIALS – Is the Financials sector a “canary in the coal mine”?  Maybe.  But I do know that we don't get sustainable bull markets in America without financials.  When banks, brokers, and asset managers are participating, the market structure is healthy.  When they're not, problems tend to follow.  On Monday, the Financial Sector Index Fund (XLF) closed at its lowest level relative to the S&P 500 Index Fund (SPY) since 2020.  Could it bounce from here?  Sure, it is at a strong level of support (see chart).  If this is just a short-term shakeout, fine.  Bull markets rotate all the time.  Is this an alarm?  Maybe.  When large-cap financials are underperforming this badly for this long, it's rarely random…and there are some divergences to watch too.  Small-cap financials are near multi-year highs, but large-cap financials are near 8-month lows.  When credit expands and capital flows freely, financials tend to lead, which is why they signal well.  When they struggle, it often shows up elsewhere soon after.  If this chart below reverses quickly, we can chalk it up to rotation.  Bull markets digest gains.  Leadership shifts.  That's normal.  Right now, internal indicators suggest we should see this ratio start to bounce/recover, which would indicate that rotation scenario.  We just have to see if it gets back above those 2020 lows fairly quickly.

2.)  JAPAN – Global equities also continue to signal a “goldilocks” economic environment where growth is accelerating while inflation is decelerating.  It wasn’t that long ago that everyone thought Japan was going to be the catalyst to be the next market wrecking ball.  That was mostly based on their longer-term government bond yields moving up so hard.  Everyone thought the famous “carry trade” was going to unwind faster than markets could handle and…boom!  You might remember I wrote about that issue back on JAN 14 and called it noise, and on JAN 22 I said that Japan’s economic problems are not likely end-of-the-world problems.  Since JAN 20, the Japanese Gov’t Bond (JGB) 30-year yield has gone from 3.91% to 3.39%...a significant and important drop.  Japanese longer-term bond yields are not in a bearish (downward bias) trend.  Could they move up from here?  Sure, but there’s a headwind for them now that they are in a bearish trend.  Japanese stocks (Nikkei 225) are up 14.85% so far in 2026 (we have exposure via VEA).

3.)  VIX – VIX has been playing chopsticks lately…up, down, up, down.  Right now it is doing that within a neutral trend zone...neither bullish nor bearish.  The TREND range 1 week ago was 22.45-19.20…now it is 19.54-16.94.  A lower shifting VIX (volatility) trend range tends to be good for stock prices.  The likelihood is that we continue to get this sideways chop, creating more choppiness for equities as well.  Mortgage rates are dropping again with bond yields in a bearish trend along with bond volatility (MOVE Index) being calm.