This series analyzes investors’ sentiments toward the financial sector in major developed economies such as the United States, Europe, and China. We’ll study these using technical indicators such as moving averages, the relative strength index, and fund flows.
For comparison, we’ll look at the performances of the largest ETFs covering financial stocks in these three regions, namely the Financial Select Sector SPDR ETF (XLF), the iShares MSCI Europe Financial ETF (EUFN), and the Global X China Financials ETF (CHIX).
Overview of XLF
The Financial Select Sector SPDR ETF attracts the most attention among financial ETFs in the United States. This is primarily because 87% of the fund is composed of large-cap stocks. With a market capitalization of $17.7 billion as of October 26, 2015, it’s the largest financial ETF.
It’s also the most liquid financial ETF, with 313 million shares trading every day. The largest holdings of this ETF are Wells Fargo (WFC), Bank of New York Mellon (BK), JP Morgan Chase (JPM) and Bank of America (BAC).
On October 23, 2015, the Financial Select Sector SPDR ETF closed at $24.14. This is above its 100-day, 50-day, and 20-day moving averages of $23.29, $24.24, and $24.11, respectively.
Moving averages can be analyzed in two ways. The first is a price crossover. This occurs when the stock price crosses a moving average, signaling a potential change in trend. The second method uses moving averages of two or more lengths. When a shorter time frame moving average crosses over a longer moving average, it is seen as a buy signal, and vice versa.
In the chart above, we can see that the ETF crossed over its 20-day moving average on October 23. Technical analysts see this as a buy signal.
Relative strength index is a technical indicator that is used to study overbought and oversold levels of a stock. Generally, if an RSI is above 70, it indicates that a stock is overbought. An RSI figure of below 30 suggests that a stock has been oversold.
In the chart above, we can see that the 14-day RSI for the Financial Select Sector SPDR ETF is 52.3, suggesting that it is nearing overbought levels but is still quite far from being considered overvalued. The ETF has recovered from an RSI of 31.3 on September 4, as witnessed in the chart above.
Read on to study fund flows to the Financial Select Sector SPDR ETF.