Monday, February 25, 2008

Deconstructing the XLF

There's been considerable blog chatter regarding the XLF lately so I thought it would be interesting to see what's going on with the ETF.
Below is a breakdown of the XLF top holdings:

What I find interesting here is that both the put/call ratio and the price are ratchetting down together. Typically you would expect to see a divergence at the bottom so the implication is that big money still has reservations about the sector.
Here are the exact numbers for the open interest configuration, showing an almost perfect bell curve of distribution and suggesting the prevalence of non-directional plays. Below is a chart of the last year's short interest. A look at the right side panel historical data for the past 14 months shows the precise change in attitude towards the XLF.

The last 3 charts were sourced through , an excellent free reference site that offers a multitude of indicators, tools and reference data.

The XLF does offer a number of attractions for both active traders and longer term traders. It actually pays a dividend (currently .87) (not good for short positions) and both daily volume and option open interest have exploded over the last 8 months, with daily volume typically over 100M. The daily range is often 2% and on momo days as much as 7-8 %, so the swings are there. As with the weekly Qs update posted on Saturday, the 50 DSMA is providing major overhead resistance for the XLF, so I'd be reluctant to get too frisky with this thing to the upside until that line is broken. Since the XLF is currently below the 20 DSMA, and has been for most of February, this is the first line of resistance to overcome. There are probably some longer term correlated pairs trades here: (long GS, short C), but I'll leave that to my readers to discover.
Intraday however, tradng prospects improve considerably as the XLF responds well to various 5 minute bar indicators such as the pivots (my favorite), the MACD, Woodies CCI and a number of other technicals. I actually prefer to trade the options because of their $1 strike increments, penny spreads for most strikes, quick fills and 5-10% daily float of the near ATMs.


Bill Luby said...

Lots of good stuff in this space here lately, Bob, so I finally got around to adding you to my blogroll.

I probably should have done this a long time ago, but I keep telling myself that its time to freeze the blogroll as is -- until it just doesn't seem fair to leave someone out.

Keep it coming!



bzbtrader said...

Thanks Bill,
Actually, it was your post on Friday that finally prompted me to look into the XLF's a little further.