The financial sector closed on Friday May 16, 2008 at $196.28.

The high over the last year was $223.89 on October 31, 2007 and the low was $174.31 reached on March 14, 2008. From the peak to the trough that represents a drop of –22.1% for the financial sector vs. the TSX which dropped –9.4% and the S&P 500, which dropped –16.9%. Year-to-date the TSX is up 8.3% and the S&P is down –2.9% while the financial sector is down –4.2%. Since March 14th the TSX is up over 10% and the S&P is up about 8.8% while the healthcare sector is up over 12.6%. Like healthcare, is this a potential longer-term trend reversal with some sustainability?

Again, like healthcare, the chart suggests that we could be seeing a shift in the trend from a negative downward channel to a positive upward channel. The current price crossed the 50-day moving average on March 1st with a brief interlude below and then back above on March 18th. It has managed to maintain it’s status above the 50-day moving average since then. We have seen the start of an upward channel forming represented by the lower trend line showing rising bottoms and the upper trend line showing rising tops.

Some of the Canadian Companies you may recognize in this sector are Canadian Imperial Bank of Commerce, Bank of Montreal, Toronto Dominion, Royal Bank Canada, Bank of Nova Scotia, Sunlife Financial, Power Financial Corp and AGF Management.

Financials are looking pretty attractive with higher dividend yields and lower valuations. I would be cautious about the timing given the recent run-up. Technically, we are getting a buy signal but fundamentals caution us because banks are highly leveraged. At the end of May we will see banks report earnings and expect more write-downs to follow in the financial sector. Royal Bank pre-announced write-downs of $855 million last week. This didn’t seem to bother investors because the price rose and has continued to do so.