As has been widely documented, the Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services exchange traded fund, and rival ETFs tracking the sector have been struggling. June 27th marked the thirteenth consecutive day in which the S&P 500 Financials Index finished lower, marking the benchmark’s longest ever losing streak.
Not surprisingly, the length of XLF’s losing streak opened the door for significant technical weakness, which sees the fund residing below its key moving averages.
“The XLF drop below its 200-day was the latest stumble in an ongoing downtrend from the fund’s late-January peak just north of $30, as the shares have formed a series of lower highs since then,” reports Schaeffer’s Investment Research. “However, the $26.50-$27 neighborhood has reliably contained XLF’s lows in 2018. The resulting descending triangle pattern most often has bearish implications, suggesting a reversal of the longer-term XLF uptrend is taking shape.”
Earlier this year, financials were also propped up by a rise in bond yields as higher interest rates typically widen the margin spread between bank loans and deposits. The spreads will further widen as the Federal Reserve has stated its intentions to raise interest rates in response to economic growth and rising inflation.
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Concerning Charts for Bank ETFs
XLF and some rival bank ETFs have recently suffered outflows. Data from the options market indicate professional traders have not been buying many protective puts on XLF, perhaps saying professionals are whittling or eliminating long positions in the fund.
“As such, the extremely thin supply of put open interest on XLF implies that money managers have very little in the way of bank stock exposure to hedge — and the stagnation in put open interest of late indicates that they don’t appear to be accumulating new shares at the moment,” according to Schaeffer’s.
XLF is down about 12% year-to-date and is lower by almost 3% in the second quarter. Unfortunately, investors have not been buying the dip in the financial services sector.
“With all of this in mind, keep a close eye on that XLF triangle pattern. Investors have already opted against buying the pullback to the benchmark 200-day moving average — and an unwillingness to defend the lower rail of this triangle, which lies along the same lines as XLF’s October-November 2017 highs, would signal a strong likelihood of greater losses for the bank sector,” according to Schaeffer’s.
For more information on the banking sector, visit our financial category.