Daily Relative Price Strength Charts Indicate Financial Sector to Outperform SP500 in Q1 2011

With the steepening of the yield curve in Q4, we are not surprised to see the XLF financial sector begin to outperform the SP500. The relative price strength chart of the XLF / SP500 bottomed on Nov 26, turned positive in December, and the Nov 5 high. This is the first time the spread has turned positive since April 2010. This week, the ratio spread pulled back to test the breakout point of the Nov 5 high. The bullishly sloped, green, one month average was supporting the Nov 5 pivot and the ratio spread bounced. These bullish attributes on the relative price strength charts is a strong indication that the financial sector will outperform the broad mkt, consistent with the yield curve steepening and US economic data strengthening in Q1. The outperformance of the financial sector may die on the vine by spring 2011 as it did in April 2010. Bear in mind that if the relative strength of the financial sector outperforms the SP500 by a measure that is significantly significant in Q1 2001, that it will breach the bearish 2 year average that prevented the financial sector from outperforming the SP500 throughout the last three quarters of 2010. Notably, the financial sector was strapped with a yield curve flattening in Q2 and Q3, a mid-cycle slowdown in the summer of 2010 and foreclosuregate throughout 2H 2010 (an overhang which persists as we enter 2011).