The XLF, as well as several bank stocks, tend to underperform around Fed meetings
Bank stocks are leading the charge higher today, after the House of Representatives yesterday voted to overhaul Dodd-Frank regulations. The Republican-led Financial Choice Act will now head to the Senate. Against this backdrop, the
Financial Select Sector SPDR Fund (XLF) is on pace for its highest close since mid-March, and XLF call options are flying off the shelves. However, buyers should beware, if recent history is any indicator: bank stocks tend to underperform during Fed weeks, and the highly anticipated Federal Open Market Committee (FOMC) meeting is right around the corner. Below, we'll take a closer look at XLF, as well as three finance stocks that could fall short next week.
XLF Could Dip Next Week
The XLF is trading 1.8% higher at $24.26, set to overtake its 50-day moving average -- a trendline that's been pressuring the shares since a mid-March drop. The exchange-traded fund (ETF) is now on pace to close atop the $24 level for the first time in nearly three months, too.
However, not only is the Financial Select Sector SPDR Fund the
worst ETF to own in the month of June, it's also the worst to own the week of a Fed meeting. In the past 10 years, XLF has lost an average of 3.4% in the month of June, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. In
Fed weeks since 2015, the XLF has averaged a loss of 1.38% -- the absolute worst -- with a win rate of just 37%.
XLF Options Trader Pays $1.5M
In the options pits, XLF traders are going call-crazy. Call volume on the ETF is running at four times the average intraday pace, with over 200,000 traded so far. That's compared to fewer than 45,000 XLF put options. According to
Trade-Alert, most of the action is attributed to one speculator buying to open a block of nearly 90,000 July 25 calls for $0.17 each, or $1.53 million total (premium paid x number of contracts x 100 shares per contract).
However, today's affinity for long XLF calls is just more of the same. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the fund's 10-day call/put volume ratio of 1.39 is higher than 72% of all other readings from the past year.
3 Wall Street Stocks That Could Pull Back
Meanwhile, several stocks under the Wall Street umbrella tend to
underperform during Fed weeks of late.
E*TRADE Financial Corp (NASDAQ:ETFC) stock has averaged a loss of 1.71% in these weeks since 2015, and
Huntington Bancshares Incorporated (NASDAQ:HBAN) stock has dropped 1.5%. Both equities have ended the week in the black just 26% of the time.
Fifth Third Bancorp (NASDAQ:FITB) stock's average Fed-week loss of 0.30% is not nearly as severe, though Fifth Third stock has ended the week higher just 32% of the time.
At last check, ETFC stock was up 3% at $37.31, set for its best close since late February. HBAN stock was also 3% higher at $13.33, set to overtake its 80-day moving average for the first time since late March. FITB shares aren't sitting out the sector rally, rising 3% to break $25, and their first close atop their 200-day trendline since mid-March.