This week’s downdraft, while widespread, was focused in one sector: financials. Indeed, the financial sector was the epicenter of Tuesday’s plunge. The Financial Select Sector SPDR Fund (NYSEARCA:XLF) fell just shy of 3% on its heaviest volume since the election.
It’s the first kind of traction bears have had in bank stocks for months. The entire sector has been on fire since November, riding high on hopes of President Trump’s bank-friendly agenda. Not to mention the anticipation of 2017 being the year of the rate hike.
Recent drama surrounding Republican efforts to repeal and replace the Affordable Healthcare Act is throwing a wet blanket on investors cheery disposition toward bank stocks.
While the long-term trend for XLF remains bullish, we could see further deterioration in the short run. Here’s a pair of financial stocks to short during the next drop.
Financial Stocks to Short: Bank of America (BAC)
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First up is Bank of America Corp (NYSE:BAC). The mammoth bank saw its stock fall as much as 13% before bouncing back on Thursday and Friday.
The high volume waterfall was sufficient in carrying BAC stock below its 50-day moving average. Plus, the 20-day moving average is now pointing lower which confirms BAC’s short-term trend is down.
With low volume accompanying the past two up days, this mild rebound is looking more like a dead-cat bounce. Pattern enthusiasts will note the potential for a bear flag formation here. While one or two more up days would help develop the setup, bears should be ready to pounce if BAC stock starts to roll over again.
Short BAC stock on a break of $23.
Financial Stocks to Short: Goldman Sachs (GS)
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Investment bank kingpin, Goldman Sachs Group Inc (NYSE:GS), was also brought low amid this week’s selling raid.
Since peaking at $255.15, GS has tumbled 9% bringing it oh-so-close to official correction territory. Like its predecessor, Goldman Sachs now sits beneath the 20-day and 50-day moving average.
But, unlike BAC, the drop in GS has been sufficient in turning the 50-day moving average lower, so its technical deterioration definitely qualifies as worse. Buyers haven’t been able to reclaim much lost ground over the past two days. The rebound attempt has been pathetic thus far. If financial stocks take another hit next week, GS is a logical target for bearish trades.
Short GS on a break below $230.
At the time of this writing, Tyler Craig held option positions in XLF.
