The big trade for the past few years was buying energy and shorting financials. As I wrote last week in Barron's Online, that relationship got way out of whack and snapped back violently to something more "normal."
With oil at a floor of sorts and financials responded to bad news again, it seems as if the trend here is back. But rather than think the old trade is going to work the way it did before, which it never does, let's just say that the fun in financials is over and it is time to make a little money in energy again. How much? Not that much as this is still a bear market. But on a relative basis energy seems to be back on top of financials.
The chart shows two distinct phases - range and trend. In the range, stochastics goes way up and way down, as you'd expect for a trading range type of oscillator. But in a trend, and don't forget we are talking about the trend in the ratio of two ETFs, stochastics only dips down to the middle of its own range.
Watch to see if the center line of the Bollinger Bands in the chart is violated and stochastics dips to the nether regions again. That will be the signal to reverse the trade and go long financials and short energy.
I suspect it will happen at the end of the bear market.