You know the old saying, where there’s smoke there’s fire. The Financial ETF (XLF) just lost 9.7% in the last 10 trading days. So when it comes to the financial sector of the stock market what is the smoke?
The smoke for financials is a higher than normal rise in certain interest rates that might signal financial distress. Recently the spread between the London Interbank Offered Rate (LIBOR) and Overnight Indexed Swap Rate (OIS) has been rising rapidly and now stands at the highest level since the Financial Crisis.
Now some folks are quickly coming out and saying there are technical issues affecting that spread. That may very well be true but it may also be like saying, ‘I know there’s smoke but there really isn’t any fire’. Yet the fact that the LIBOR-OIS spread is the highest in almost 10 years seems like something to be concerned about.
Financials Break Trend
And that brings me to another kind of smoke. The XLF broke a 2 year trendline last week as banks, insurance companies, etc. were getting sold and sold hard. (see chart below).
The daily chart below shows a better view of the more recent price action. Friday’s close was below the closing low of the February selloff and within $0.01 of the February 9th intra-day low.
Most of the banks really broke hard during the last 2 days of the week. So selling the financials is another kind of smoke that says that someone knows something or suspects something and they are not waiting around to find out the details.
I track 10 major banks on one of my screens. Here were the 5 most heavily traded banks on Friday and their performance for the week.
Bank of America (BAC) : -9.3%
Citigroup (C) : -7.6%
JP Morgan Chase (JPM) : -7.3%
Morgan Stanley (MS) : -9.4%
Deutsche Bank (DB) : -13.1%
All of these banks are now down for the year except JPM which is up $0.07. Deutsche Bank is down 27.7% for the year. Not a pretty picture. And there may be more smoke coming out of the financial sector.
As Jesse Felder discusses in his post “It’s not just LIBOR pointing to financial distress”, there’s also a little smoke coming from financial commercial paper.