XLF, You’ve Seen Better Days

BACIn the first quarter, things were finally groovy for major bank stocks and the corresponding ETFs. Bank of America (NYSE: BAC) jumped about 70% and was the best-performing stock in the Dow Jones Industrial Average during the first three months of the year. Buoyed by a risk on environment and positive news from the Federal Reserve stress tests on the 19 largest U.S. financial institutions, investors bid up bank shares ranging from the strong, such as J.P. Morgan Chase (NYSE: JPM) and US Bancorp (NYSE: USB), to the group’s red-headed step-children such as BofA and Citigroup (NYSE: C).


Well, something bad happened on the way to the coliseum because bank stocks have seen their leadership status turn into laggard designation in short order. Since the start of the second quarter, the Financial Select Sector SPDR (NYSE: XLF), the largest of all bank ETFs, has tumbled 11%.


XLF, which is home to 83 stocks, remained comfortably above its 52-week low and that ominous benchmark doesn’t appear to be threatened in the near-term unless Europe truly implodes and another financial crisis starts. On the other hand, XLF is languishing more than 10% below its 52-week high at the moment. To say the fund is vulnerable on a break of support at $13.75, also the 200-day moving average is an understatement.


In recent days, Dow component J.P. Morgan has been an anvil on the back of XLF. The largest U.S. bank by assets, J.P. Morgan is also XLF’s third-largest holding with a weight of 7.41%. The stock has been punished recently after the bank disclosed a $2 billion loss tied to trading complex and risking credit derivatives. The bank has since warned that loss could grow to $3 billion and on Monday the company announced it is halting its share repurchase program.


On another ominous note, XLF is heavy on enough capital markets firms that the fund has seen an adverse impact by the botched Facebook IPO (NASDAQ: FB). Goldman Sachs (NYSE: GS), another XLF top-10, reaped a tidy windfall by helping lead the Facebook IPO with Morgan Stanley (NYSE: MS). However, it is the underwriters that have been blamed for aggressive pricing that led to Facebook’s plunge. The result? Morgan’s Facebook exposure has done precious little to lift XLF’s fortunes.


Unfortunately, things aren’t likely to get any easier for XLF before the end of the second quarter. Even Europe wasn’t a nagging problem for bank stocks; June marks the start of historical seasonal weakness in the shares of financial services firms. Think traders don’t pay attention to season trends? Think again. There’s a book called "The Stock Trader’s Almanac" devoted to seasonal trends and if it proves accurate, which it usually does, June won’t be a good time to be long bank stocks.

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