Big banks like Citibank, Wells Fargo, Bank of America and JP Morgan Chase are scheduled to kick off fourth quarter earnings reports for the financial sector next week, but market mavens are mixed on what to expect, warranting caution for investors.
In particular, investors looking to play the Financial Select Sector SPDR (NYSEArca: XLF) have to be wary of its technicals, according to Blue Line Futures President Bill Baruch. The financial sector took a hit in 2018 as evidenced by XLF, which lost 13 percent.
Like many equities in the preceding months, XLF got hit by the volatility cycle to end 2018 as it fell below its 200-day moving average of around $27. Investors looking to buy the dip should tread lightly.
“I’m very cautious right here with the banks. I think there’s a lot of overhead resistance around the 25 area,” said Baruch on CNBC’s “Trading Nation.”
If $25 is too high, then when would be an opportune time to jump into XLF? Baruch says to look back to the financial crisis for the right price.
“I’m looking at a trend line dating back to 2009, and this comes in right above 20 bucks. So I think if you’re cautious and it does get down there, that’s going to be a great buy for the long term,” said Baruch.
The Time is Now
However, others like Susquehanna’s Stacey Gilbert say that XLF and other bank stocks at their current levels represent a good buying opportunity. Gilbert cites traders playing the bank trade through call spreads–a move that is forecasting a move to the upside, but also protects the downside if the trade goes awry.
“When we look specifically to earnings, we are also seeing increased volatility setting up here, so I think investors are looking for more signs of what could possibly be going on. … We continue to see upside call buyers … but interestingly they’re doing it through call spreads, so they’re really saying that these tail upside moves are unlikely,” said Gilbert.
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