ETF Trends
ETF Trends

Down 11.2% year-to-date, the Financial Select Sector SPDR (NYSEArca: XLF) is the worst performer among the sector SPDR exchange traded funds. Rival financial services ETFs, such as the iShares U.S. Financials ETF (NYSEArca: IYF) and the Vanguard Financials ETF (NYSEArca: VFH) have not been much better.

Oil’s bear market has been cited as one of the reasons for the struggles of the financial services sector. J.P. Morgan plans to add $500 million to reserves for oil and gas and an additional $100 million related to metals and mining in the first quarter. The additions come on top of the bank’s $815 million in oil-and-gas reserves and $240 million in metals and mining as of the end of 2015.

The disclosures followed a worsening energy loan outlook. HSBC Holdings (NYSE: HSBC) recently revealed growth in loan-impairment charges in the fourth quarter to $1.65 billion from $1.01 billion year-over-year, with most of the charges related to a struggling energy sector.

Now some technical analysts see the financial services sector, the second-largest sector weight in the S&P 500, sending ominous signs.

“A two-year topping pattern in the benchmark KBW Bank index, known as the BKX index, had broken to the downside to indicate the start of a bear phase (see Chart 1). Given the size of the pattern in terms of time, the two months that have elapsed is just not long enough to suggest that the bottom is near. The Financial Select Sector SPDR exchange-traded fund ( XLF ) follows a similar trajectory,” writes Michael Kahn for Barron’s.

Investors hoped that higher rates would allow banks to capitalize on wider net interest margin – the difference between deposit rates and lending rates, but the global economic uncertainty has weighed on prospects for a quick Fed rate hike schedule.

While U.S. banks have some exposure to over-leveraged oil companies, the level of exposure to the distress energy industry is not up to the scale of the U.S. housing market that triggered the 2008 run. 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.

“A weak financial group is the bane of the stock market. Financials are one of my four key sectors to gauge market health, along with home building, technology and retail. Now that the temporary revival of financials is over, bulls have to take a step back,” according to Barron’s.

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.