Cautious trade in finance sector amid busy economic calendar
03/01/17

The next two weeks are packed with events, and trading activity suggests nerves are on edge in the world of finance.

Federal Reserve speakers, major economic reports and President Trump’s first Congressional speech were all on the near-term agenda yesterday. The uncertainty spread at a time when equities had already ridden a wave of optimism to all-time highs.

The Financial Select Sector SPDR Fund (NYSE ARCA: XLF), which tracks a wide range of banks, brokerages and insurance companies, has led the charge since late 2016. Analysts partially credit the move to hopes that tax cuts and infrastructure spending will lift economic activity and push interest rates higher.

Traders guarded against potential disappointment yesterday by purchasing over 65,000 10-March 24 puts (options to sell a security) in XLF for $0.11 and $0.14. Those contracts fix a minimum level where investors can unload the fund. They will more than quadruple in value from a 4 percent drop to $23.50 but expire worthless at the end of next week if no decline takes place. XLF ended the session down 0.04 percent to $24.54.

There are potentially major catalysts in half of the eight remaining sessions until those puts expire. Aside from Trump’s speech last night, today’s agenda brings the Institute for Supply Management’s key manufacturing index, the Fed’s Beige Book of economic conditions and an address by policymaker Robert Kaplan.

Friday has even more Fed speeches, including an economic prognosis by Chair Yellen. Next Wednesday, March 8, features ADP’s closely watched private-sector payrolls report. It’s followed two days later by the Labor Department’s non-farm payrolls report, which is even more important.

Puts outnumbered calls in XLF by more than 4-to-1 yesterday. That’s a big shift from the typical ratio in the last month and reflects a broadly cautious tone.

The fund is now back to levels last seen almost a decade ago during the broader financial crisis. Companies in the industry drifted for years as they recovered, and started coming to life in November on hopes that higher interest rates would translate into bigger profits. Some major firms including JPMorgan Chase (NYSE: JPM), Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) have also benefited from increased trading. 

In summary: hopes of good news have driven financials higher, but yesterday traders were hedging against a letdown.