We recently outlined which indicator we used to identify whether or not the current market has the potential to face systemic risk. The indicator was none other than the XLF ETF, as financial stocks are the heart of the financial system. We discussed an obvious ‘line in the sand’ level of 31 points, which is currently being thoroughly tested. What's at stake at the moment is whether the market is on track to crash or not.

Well, how do you know if there is any systemic risk in the market? We have discussed this previously:

"We track a limited set of leading indicators. All of them are shared every weekend with members in our premium research service Momentum Investing. There is one additional chart we’ll be watching closely: the XLF ETF. That’s not because we are interested in taking a position in the ETF or any stock in that ETF. We consider the XLF ETF one of our indicators to help understand the contagion risk of the SVB situation."

We have also previously discussed the specific level that is being tested at the moment:

"For now, the XLF ETF is still holding. It will certainly continue to thoroughly test the 31 level, similar to what it did in June of 2022 and the September-October period of 2022."

Below is the up-to-date XLF chart. This indicator fell outside of its rounded structure, one that has been in the making for 12 months now. It did so back in June, but it recovered within a three- to five-day timeframe.

The message of the XLF ETF is very simple: next week is a make-or-break week in the markets. If XLF closes back in its rounded pattern, we will see a replay of last June of sorts. However, if XLF continues to edge lower, the markets won't look pretty in April.

In case it’s not sufficiently clear how crucially important the 31 level is for the ETF, you might find it easier to understand if you look at the weekly chart over a 15-year timeframe. A drop below 31 would open the door for a quick 30% drop. That’s not what the bulls want to see.

In the meantime, our Momentum Investing portfolio is starting to enjoy the positions we selected in the broader AI space. We are also preparing a silver position for members. Obviously, we’ll deploy tight stop losses in case XLF continues to lose ground, and we’ll happily become more aggressive in case the ETF respects key support next week.

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