The financial stocks particularly took a beating last week, and that is the one sector I have repeatedly said needed to stay strong. The Financial Select ETF (XLF) closed at its session low on Friday, with backup support at $23.50 holding. The close below $24 was a bearish development, and there is further risk to $23-$22.75 and the February lows. Resistance is at $23.75-$24, followed by $24.25 and the 200-day moving average.
One of the biggest financial stocks, Goldman Sachs (GS), fell below $200 to start the week, but it traded past $203 on Tuesday. Wednesday’s range of $199-$202.75 and close above $200 left mixed clues before Thursday’s drop to $196.75. Shares opened at $193.66 on Friday, and I talked about going short via put options if $195 failed to hold. From a recent Trade of the Day:
“Longer-term bearish traders could target the GS September 190 puts (GS150918P00190000) on a drop or close below $195. If $210 holds as resistance on a rebound rally, these options will get cheaper, so traders could watch the GS September 195 puts (GS150918P00195000) as well.”
Needless to say, these options did really well, as the GS September 190 puts (GS150918P00190000) soared over 240% on Friday, while the GS September 195 puts (GS150918P00195000) zoomed 148%.
The financial stocks could continue to struggle until the Fed makes a move in September. While the debate on whether to raise rates continues, I have been in the camp of those who believe that a rate hike would be bullish for the market. The uncertainty of the Fed’s decision in September is probably weighing more on the market than China’s devaluation of its currency.
A rising-rate environment is not good for consumers, but a quarter-point rate hike is needed just to get the Fed out of the market’s way. Banks make more money in a higher-rate environment, but the effect of a rate hike worries Wall Street.
There is talk that the Fed has boxed itself into a corner, as some believe that they should have already raised rates. With the market already in correction mode, the Fed can’t use the excuse not to raise rates to keep the market propped up. However, there is also talk of a recession coming, and the Fed doesn’t want to raise rates only to lower them again. In my opinion, the Fed should pull the Band-Aid off and see what happens.
The Consumer Discretionary ETF (XLY) held its 200-day moving average last week. The stocks that make up the XLY include companies that make consumer products like food, beverages, drugs, tobacco, household products and personal products. If the index is trending higher, the market usually follows, as it reflects the strength of the economy. There is additional risk to $70-$68 if the bulls can’t hold $72 this week. A rebound back above $76-$77 would be a slightly bullish signal that the worst is over.
In the meantime, I’ve lightened up on trades, though I am still holding the Bank of America (BAC) September 18 calls
If a bottoming process occurs this week and into next week, there will be some gems to go long, maybe even among financial stocks. However, if there is continued weakness, companies with deteriorating financials and weak charts will provide short opportunities.
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