MorningWord 1/9/16: Bank Heist – XLF

by Dan January 9, 2017 9:38 am • FREE ACCESS

On Friday’s Options Action on CNBC we discussed the out-performance in bank stocks since the presidential election in early November, and the possibilities for a pullback in bank stocks following Q4 earnings results and Q1 guidance. Bank earnings reports start this week with JP Morgan (JPM), Bank of America (BAC) and Wells Fargo (WFC), watch here:

Here were my notes for the hit:

I guess the most important take-away here is expectations vs current sentiment… which is white hot. There is a decent chance that many of these banks will report results better than current consensus estimates, but given how quickly sentiment turned, how quickly rates moved and how much the stocks in the group have gone higher, It was take a string of impressive beats and raises to keep the upward momentum going. As I stated in the video from Friday, investors who own bank stocks might consider protection using XLF puts between now and the end of Q1:

The etf likely bangs up against long term technical resistance at $25:


While the next real support level is just above $20, the breakout level from November:


To be frank this is not a great outright bearish bet. Investors were clearly underweight the sector, and the sentiment change was tectonic and unlike anything I have seen in a very long time in U.S. equity markets. Because I would be surprised to see investors completely cut and run on conservative Q1 guidance, especially when you consider the enthusiasm regarding a rising rate environment, the effect on net interest margins, and the potential for the roll back of regulations that have restricted profit opportunities. But these stocks may have gotten way ahead of themselves already. I see no guarantee that rates are going that much higher anytime soon, and I’d be shocked if banking deregulation was a layup at this stage of recovery. And it may be replaced by something else: