Few sector exchange traded funds were hoping for the Federal Reserve to raise interest rates last week the way financial services funds were. Financial services ETFs, such as the Financial Services Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, were believed to be prime beneficiaries of the Fed’s exit from its zero interest rate policy, an exit that has yet to take place.
Until last month, data suggested traders had been betting the Fed will boost borrowing costs at its September meeting, but some rate-sensitive asset classes say otherwise. Actually, Treasury yields say otherwise and 10-year yields now reside at multi-month lows, somewhat crimping ETFs tracking sectors positively correlated to rising rates, such as financial services funds. [What These ETFs Say About Rates]
One point of attraction for XLF and rival financial services ETFs has been the discounted valuations of big bank stocks. However, the cheapness of U.S. banks belies the strength of the financial sector. Over few years, banks have shed unprofitable businesses and assets while bulking up capital to return some to shareholders through stock buybacks and dividends, the Wall Street Journal reports.
Now, XLF and other financial services ETFs are facing technical weakness after the Fed once again declined to increase borrowing costs. Through July, XLF was climbing, but that changed last month “when price collapsed and bearish (liquidation) volume surged to new highs… as price erased all the gains of 2015 and more in just three sessions. A logical retracement catapulted price into the underside of the falling 20 day EMA (Green) which is a target to play for on a retracement swing,” according to Afraid To Trade.
XLF focuses on some of the largest financial names taken from the S&P 500. Investors can also focus on bank stocks as expanding economy could push more to take up new loans.
“After a failed breakout beyond this level – it’s roughly $23.40 per share – price formed a nasty Bearish Engulfing Candle on the Daily Chart and then broke under the lower rising trendline to trigger (and confirm) a sell signal in the ETF,” notes Afraid to Trade. “The implication from the breakdown is that price can once again move to test the spike-reversal lows near $22.00 per share in the ETF and comparable price levels in the individual financial companies that comprise the sector ETF.”
Financial Services Select Sector SPDR
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.