XLF Heads Into Historically Bearish September Near Key Technical Level

Bank stocks will be in focus as the tax reform debate heats up in DC

Karee Venema
Aug 31, 2017 at 10:30 AM
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Wall Street will likely pay more attention to bank stocks in the next several weeks, as the debate around tax reform in D.C. heats up. The Fed's upcoming policy meeting could also have eyes trained on the sector, though CME Group's Fed Watch tool indicates the market is pricing in a slim chance of a September rate hike. With this in mind, here's a closer look at the Financial Select Sector SPDR Fund (XLF), which has historically been one of the worst ETFs to own in September.

XLF hit $25.59 on Aug. 8, its highest mark since December 2007. However, the $25 region reared its ugly head as resistance, a level that coincides with a 38.2% Fibonacci retracement of the fund's 2003-2007 surge, which brought XLF to a record high of $30.98 on May 31. As such, XLF pulled back to its 80-day moving average -- a trendline that served as a springboard for the XLF last fall, just before the sector's post-election rally.

xlf daily chart august 31

And even though the shares found a foothold here, they are still on track to close August at a loss, their first monthly decline since May. What's more, September has historically been the weakest trading month for the XLF -- as well as the broader S&P 500 Index (SPX) -- averaging a monthly loss of 2.7% since its inception, according to data from Schaeffer's Quantitative Analyst Chris Prybal.

Against this backdrop, options traders have targeted both calls and puts in the front-month series. Specifically, the September 23 put and September 25 call are XLF's most heavily populated strikes, with nearly 695,000 contracts collectively outstanding -- almost 16% of the fund's total open interest. 

Data from the major options exchanges points to notable buy-to-open activity at the put strike, meaning XLF options traders expect the shares to sink below $23 by expiration at the close on Friday, Sept. 15. The call, however, has seen a mix of buy- and sell-to-open activity. Those buying the calls are betting on a breakout above resistance, while those writing the calls expect $25 to continue to serve as a ceiling in the near term.

Regardless of whether it's puts or call, it's an attractive time to buy premium on short-term XLF options, considering they're pricing in low volatility expectations at the moment. Even with a number of potentially explosive events on the horizon, the fund's Schaeffer's Volatility Index (SVI) 14% ranks in the 3rd annual percentile, while its 30-day at-the-money implied volatility of 13.8% is docked below 84% of all comparable readings taken over the past year.

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