New Trade XLF: Banks Withdrawal from Rally

by Dan April 5, 2012 2:58 pm • Commentary

The XLF is up about 20% YTD with many of it’s large components up a good bit more so far in 2012.

Seven of the top 10 largest members of the index report Q1 earnings prior to Apr Expiration, those 7 listed below (excluding MS at 15th) also make up almost 40% of its weight.

Report Date     YTD Return

WFC      4/13                ~23%

JPM       4/13                ~33%

C             4/16                 ~32%

GS           4/17                ~30%

USB        4/17                ~16%

AXP        4/18               ~23%

BAC        4/19                ~66%

MS           4/19                ~22%

What I find most interesting about the price action in the banks as they were clearly the best performing sector in the SPX last Quarter, but while many enjoyed a dramatic leg higher in early March, most appeared to top out well before the broad market.  For instance GS, C and BAC are all down about 8-10%  off of their mid March high, while MS is down almost 15%.

So as we approach Q1 reporting season in the next 2 weeks there are a couple things that are pretty obvious to me, first the “big money” who bought aint there for Q1 results, that said there is a shit-ton of “fast money” in the names that are likely to have their fingers on the trigger if we don’t get a “beat and raise” sort of vibe from some of the early reports.  The Second sort of obvious observation is that  Q1 results are clearly in the stocks, and given recent rumblings of a potential downgrade by Moody’s of certain banks stocks, renewed fears of Euro financial stress and the potential for weak visibility when companies guide, it could make some sense to look for a cheap way to play for a pull back in the sector as a whole or to find what appears to be “dollar cheap” protection.


Options are pretty cheap in the index, especially when you consider the slew of earnings coming up and the dodgy situation in Europe. The current vols are near multi-year lows:

Skew is mostly to the downside except in the near month where its to both the downside and the upisde, but that’s not saying much as the 15/16 strangle is only about 20c:

MY TRADE:  XLF $15.55 Bought the Apr 15 Puts for .11

Break-Even on Apr Expiration: Stock 14.89 or lower and you make money, down about 4%.

Rationale:  I will look to spread this by selling the Apr 14 Puts against the 15s if the stock starts to go my way.  I recognize that the XLF generally exhibits much less volatility than it’s individual components, but I want to avoid individual name risk and make a low premium defined risk bet that if earnings and visibility are not up to high expectations that the stock will at least pull back to it’s 50 day moving average at 15.03   Now I know a straight Put purchase is fairly pedestrian in a name like this, but I think it is a relatively cheap way to get near term downside exposure in sector that has racked up dramatic gains in a short period of time.  

1 yr5 XLF chart from bloomberg