On April 22, 2008, I wrote about how the Energy and Financial sectors had diverged from each other, up to that point, to a degree that rarely happens between any two major sectors of the market. I proceeded to suggest a trade of shorting Energy while going long on Financials.
Let us see how that trade turned out, about 1 year after it was suggested.
Both sectors did worse than the S&P500, but as we were short on Energy, this is favorable. With dividends reinvested (which for Financials, were substantial), we come to total returns of :
So this trade earned a return of -5.36%, vs. -32.20% for the S&P500. This is a dramatic outperformance relative to the index, even though staying in cash would have been even better.
For a next step, I would cover the short on Energy, and double down on my long position in Financials, given the low current price of Financials.