The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial sector exchange traded fund, is widely viewed as the bellwether financial services ETF so its decline of nearly 3% last week is noteworthy.
Although flows data suggest investors have been embracing XLF in significant fashion since the start of the fourth quarter, other data points indicate some traders are preparing for more declines in the marquee financial services ETF.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration.
“Taking a quick step back, roughly 77,000 XLF put options traded Thursday — 1.1 times the average daily volume — compared to 71,000 call options, fewer than what’s typically seen exchanged in a session. The weekly 11/10 26-strike put was most active due to a 19,417-contract block that was bought to open for an initial cash outlay of $310,672 (number of contracts * $0.16 premium paid * 100 shares per contract),” reports Schaeffer’s Investment Research.
Deregulation could also help the financial sector improve their margins. President Donald Trump’s administration has shown its eagerness in cutting back the red tape and remove some of the post-financial crisis regulations that has stifled the industry.
Related: Tax Reform Plan Could Have a Treat for Banks
Some good news for XLF and friends is that the financial services sector is widely regarded as perhaps the only sector in the U.S. that is attractively valued relative to the broader market and its own long-term averages. The financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.
“Thursday’s accelerated put volume marks a change of pace in XLF’s options pits. Over the past 50 sessions, nearly 981,600 XLF calls have been bought to open on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), compared to 381,619 puts. The resultant call/put volume ratio of 2.57 ranks higher than 97% of all comparable readings taken in the past year, pointing to an unusual bullish bias relative to bearish in recent months,” according to Schaeffer’s.
In the third quarter, the Federal Reserve confirmed it will begin unwinding its balance sheet and bond market participants continue expecting another interest rate hike in December, which could also benefit the financial services sector.
For more information on the financial sector, visit our financial category.