The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, has traded slightly higher this month and there is a slew of looming events that could make an XLF an interesting, potentially volatile play over the next several weeks.

Market observers have previously warned that Wall Street banks could face pressure as tepid market volatility could have contributed to more muted trading desk activity. Furthermore, the Federal Reserve has signaled its intentions to cut interest rates, which would further hurt the banking industry’s ability to generate profits from lending.

XLF “jumped 0.4% on Sept. 18 — the day of the Fed’s September rate cut — before embarking on a two-day losing streak. The shares have since strung together three straight weekly losses, and are down another 1.6% since last Friday’s close to test support at their 200-day moving average, last seen at $27.02,” according to Schaeffer’s Investment Research.

Adding to the near-term intrigue surrounding XLF is third-quarter earnings season, which will start in earnest in a few days. The financial services sector is the group that gets earnings season rolling, meaning a slew of big-name XLF components will soon be stepping into the earnings confessional.

Other Factors

Upcoming earnings calls could bring more commentary on how lower interest rates are affecting banks’ margins. On a related note, it’s possible the Federal Reserve again lowers rates later this month, potentially bringing fresh pressure to those margins.

With the capital markets possibly expecting a cut in interest rates, could this affect banks’ lending businesses to the point where they suffer? Some analysts question whether the sector strength can continue through the rest of 2019. During second-quarter earnings season, banks frequently guided lower on net interest margins.

Related: Financial Sector, Bank ETFs Could Find Support from Regulatory Relief 

“Short-term XLF options traders have rarely been as put-skewed as they are now, per the fund’s Schaeffer’s put/call open interest ratio (SOIR) of 3.37, which ranks in the 99th annual percentile,” notes Schaeffer’s. “The October 25 and 27 puts are home to peak front-month open interest, and data suggests the two strikes may have been used in early September to initiate a long put spread. If this is the case, the spread strategist expects XLF to settle right at $25 at the close next Friday, Oct. 18.”

The Direxion Daily Financial Bull 3X ETF (NYSEArca: FAS) and the Direxion Daily Financial Bear 3X ETF (NYSEArca: FAZ) could be worth considering for aggressive, short-term traders.

For more information on the financial sector, visit our financial category.

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.

Subscribe to our free daily newsletters!
Please enter your email address to subscribe to ETF Trends' newsletters featuring latest news and educational events.