This week we are going to look at the Financial sector. Last time we reviewed this sector, in September 2005, we were generally bullish. Since that time the Dow Jones U.S. Financial Index has been up over 7%. Now though, we have reason to believe that the sector will not be doing as well for the next few months. First though, we would like to state that we do own financial companies in the portfolios of some of our other services but the time horizon for those recommendations are much longer then what we will be talking about in this article. The companies that are in the Dow Jones U.S. Financial Index include a lot of names that you're probably familiar with. Citigroup (C), Bank of America (BAC) and American Express (AXP), just to name a few.

Overall performance of this sector for the last couple years has been pretty much right in line with the S&P500 but lagging slightly for the last three months. As you can see in the chart below, the main reason for our bearishness on this sector is the resistance level that it just reached. It has just started to move lower and you can see that both Stochastics and MACD are starting to show bearish signals. On Stochastics the level has dropped from around 90 to 60 in just a couple weeks. With MACD, it just officially crossed over to the bearish side. As of Friday, the index closed at around 513, we believe that it will fall down to 480 at least in the next few weeks. This will not be a huge move but as we said before, this will probably play out a lot faster then some of our other recommendations. Our stop would be at 525.

If you would like to trade the financial sector, iShares has several funds available but their IYF fund corresponds directly to the Dow Jones U.S. Financial Index. For the last year, some of the best performers relative to the index have been Merrill Lynch (MER), Prudential Financial (PRU), and Lehman Brothers (LEH). Some of the ones that have not done so well have been Wachovia (WB), Federal National Mortgage Association (FNM), and Bank Of America (BAC). There are also, of course, a variety of mutual funds that invest in Financials.

Price Headley is the founder and chief analyst of BigTrends.com.