ETF Trends
ETF Trends

Financial services stocks and exchange traded funds, such as the Financial Select Sector SPDR (NYSEArca: XLF), have struggled to start 2016, a disappointing theme considering the Federal Reserve raised interest rates last month and is expected to do so again at least a couple of times this year.

Year-to-date, XLF, the largest financial services ETF by assets, is off about 11%, making it one of the worst performers among the nine sector SPDRs. At the moment, the fundamental case for XLF is sound, but the ETF’s chart indicates investors should be careful with this and other financial services ETFs.

“The banking sector peak came in July of last year for both the Financial Sector ETF (XLF) and the Banking Index (BKX) – both on target with our pattern analysis. And after recovering most of the losses from the August stock market swoon, the banking sector peaked again and has turned lower in 2016,” according to See It Market.

Previously, the Federal Reserve’s decision to hold off on an interest rate hike, ongoing economic weakness and concerns over trading revenues have weighed on the financial sector’s outlook. With higher interest rates in place, financial services ETFs entered 2016 as potentially important tells regarding what investors should expect from equities this year. The sector is the second-largest weight in the S&P 500 behind technology.

However, there is another important reason to consider bank stocks and ETFs: Rising profitability. In the case of regional banks, that profitability is expected to be enhanced if the Fed proceeds with boosting borrowing costs for the first time in nine years. XLF is also seeing its options starting to look pricey relative to historical norms.

More pressing is recent price action in financial services stocks and ETFs, which highlights the group’s vulnerability to a flattening yield curve. One point of attraction for XLF and rival financial services ETFs has been the discounted valuations of big bank stocks.

“This type of price action is concerning to say the least.  A banking sector peak have implications for the global economy, etc…,” adds See It Market. “My biggest fear is that we just finished classic A-B-C corrective waves on both XLF and BKX and we’re going to take on the 2009 lows in the banking index.”

Financial 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.