It was a tumultuous Tuesday for the Financial Select Sector SPDR (NYSEArca: XLF) as the largest exchange traded fund dedicated to the financial services sector notched its biggest intraday loss in 10 months.
When markets reopen Thursday, XLF will come into the day with a year-to-date loss of 7%, residing 6.09% below its 200-day moving average. Those factors and others are encouraging some options traders to take a bearish view on XLF.
“At last check, roughly 120,000 puts were on the tape, 1.6 times the expected intraday amount, and almost quadruple the number of calls exchanged,” reports Schaeffer’s Investment Research. “While traders may be purchasing new positions at the weekly 12/14 26.50-strike put — XLF’s most active option — data from the International Securities Exchange (ISE) confirms 12,000 weekly 12/14 25-strike puts were bought to open for 14 cents apiece, or $168,000 (number of puts * premium paid * 100 shares per contract). Breakeven for the put buyer at the close next Friday, Dec. 14, is $24.86 (strike less premium paid).”
Big Disappointment
The 2018 performances of XLF and rival financial services ETFs are undoubtedly disappointing for investors that bet the sector would rally against the backdrop of rising interest rates. The Federal Reserve has boosted borrowing costs three times, moves many market observers believed would lift the fortunes of the rate-sensitive financial sector.
Other factors may be hampering the sector. Some market observers warned that banks may even be cutting back on lending as bankers are becoming more concerned over the late-cycle U.S. economy. Indicators such as credit-card charge-off rates have increased, though the rate leveled off over the summer. There are some key technical levels on XLF to watch over the near-term.
“Looking at the charts, the $27.50 level emerged as a stiff layer of resistance following an Oct. 10 bear gap, and is currently home to XLF’s 30-week moving average. But while the fund is down 6.7% year-to-date, it hasn’t closed a week below the $25 mark since mid-September 2017,” according to Schaeffer’s.
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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.