The financial sector was by far the biggest beneficiary of the trillion dollars injected into the economic system by the Federal Reserve. The traditional drivers of the sector, such as interest rates, took a back burner to the surge of capital.

Acting like a shot of adrenalin, the money sent the sector’s biggest players soaring higher in 2013. One of the primary exchange-traded funds (ETFs) tracking the sector, iShares Dow Jones US Financial (NYSE: IYF), was up close to 30%, with many of its components posting similar massive increases.

But all good things must come to an end. I think the party is over for this sector — at least for the rest of 2014.

The sector sold off hard in January but has staged an impressive bounce back in February. Looking at the iShares financial ETF’s daily chart, you can clearly see the sharp selling in January and the bounce-back near the highs in February.  

#-ad_banner-#As you know, I don’t place much credence in traditional technical analysis alone as a predictive tool in most cases. However, this pattern, combined with what is happening fundamentally, paints an ominous picture for the near-term future of the financial sector.   

To see what I mean, think of the stock market as a living entity. (I know this may seem like a weird exercise, but play along with me.) The creature known as the stock market has a single goal, and that is to lure as much “food” — capital, in other words — into itself as possible to keep its massive infrastructure thriving. It feasts on this “food” through profit-taking.

This task is accomplished as the market pushes higher and higher while attracting more and more capital. This capital arrives in different waves, beginning with insider buying. Next, the institutional folks go to work, helping to push the trend higher. Finally, the trend-following public jumps on board, pushing the market to new highs.

As soon as certain price levels are hit, however, the profit-taking begins: The insiders start to sell, followed by institutions, and finally the public throws in the towel, often at a loss. If the market is unsatisfied with the amount of “food” it takes in from the first big drop, it starts the cycle all over again.

However, this time, the move higher isn’t as strong or pronounced because many of the original buying professionals recognize the consistently repeating pattern. This makes the next run higher weaker as it’s primarily the public and other “weak hands” pushing prices higher.  

Now, with this scenario in mind, take another look at the chart above. See what I mean?   

I strongly think that the top is in for the financial sector, and we will see a much more severe sell-off than the original one in January. I don’t know when this will happen, but I expect it to start in the near future.

When this death pattern is combined with adverse fundamental factors, it builds my bearish case. The Fed is dialing back on its bond buying and other quantitative easing measures, and though it’s doing so in a prudent way, the negative price effects are still being felt. Talk of lifting interest rates and other price-slowing measures is also being floated by the central bank.   

As always, the insiders are on top of this pending downtrend. According to The Wall Street Journal, insiders at the six largest U.S. banks have sold $26 million worth of their holdings in January. While this number may not seem like much at first glance, it is the highest amount of insider sales in January since 2007. Shares in the top six U.S. banks soared an average of 41% in 2013 — and the insiders are taking profits.

Here’s a quick technical overview of JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC) and Goldman Sachs (NYSE: GS). Every pattern is bearish despite the 50- and 200-day simple moving averages still indicating an intact uptrend. JPM shows the climb higher until the selling in January. Next, a bounce higher in February, then selling creates a bearish pattern on the daily chart.
 

WFC’s chart shows a clear triple-top pattern in the $46 to $47 area.  
 

Finally, Goldman’s daily chart indicates heavy resistance in the $167 range.

Risks to Consider: The Fed could ramp up its buying again or any other number of bullish events could occur, reversing the ominous signals.  Should you decide to short any of the financial names, be sure to use stop-loss orders and know that this analysis gets thrown out the window if new highs are reached.  

Action to Take –> Based on my analysis, following the insiders by taking profits now in U.S. financial stocks appears to be a shrewd move. In addition, you may want to enter short positions on those financial stocks you feel comfortable shorting.  

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