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Financials Outpace the Market to the Downside. What Next?

Financials Outpace the Market to the Downside. What Next?

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  • As earnings season fast approaches us, it’s banks that officially kick it off. JP Morgan Chase & Co (JPM) announces on April 14 along with Wells Fargo & Co (WFC). Citigroup Inc (C) and Bank of America Corp (BAC) follows them on March 15. Despite the significant action by the Federal Reserve and the steepening of the U.S. Treasury yield curve, it has not helped banks and financial in general. In fact, if there was one sector to watch to see how the Fed is doing, it is financials. The sector makes up about 10.93% of the S&P 500 Index.

    On Wednesday, it was the financial sector that led the market to the downside with over a 6% decline. The performance of the sector can be tracked using the Financials Select Sector SPDR ETF (XLF). It’s top five holdings in order are: Berkshire Hathaway B (BRK.B), JPM, BAC, WFC, and C. Despite an upgrade by Bank of NY Mellon (BK), JPM finished over 6% lower on Wednesday.

    The price pattern forming on Wednesday on XLF is like many stocks over the past few trading sessions as the near-term momentum peaked and is now fading. This type of pattern is a bear flag pattern that form with a straight-line sell-off followed by a neutral or upward sloping channel. The confirmation of the pattern is the type of movement we saw today, breaking out of the channel.

    The near-term potential is a retest of the March low near $17.50. This is a huge bell-weather for the market as a break of that support is a seriously bearish indication of trouble.

    Option traders may want to consider a play that plays into weakness but is out before the earnings. The 9 APR 20 20/19 long put vertical can be bought for $0.45 or less. This provides a max gain of $0.55 or 122% in 8 days if the stock closes below $19. Consider closing early if the vertical can be sold for $0.80 or more.

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