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.
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.
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.
Looking at the “five-year weekly chart below, the uptrend has dominated the price action for the bulk of the time period, but the close below along with the failed attempt to move back above the trendline at the end of 2015 was enough of a signal for traders to bet on a reversal. The failed attempt at creating a new swing high near $24.81, the bearish crossover between the MACD and its signal line and the recent close below the short-term support level will also likely be used by the bears as an indication that prices could be headed lower,” according to Investopedia.
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.
Still, technicals cannot be overlooked. XLF resides more than 17% below its 52-week high and more than 12% below its 200-day moving average. The ETF has tumbled 12% since the start of this year.
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.