Financial Services Were the Weakest Link in SPY Last Week


Jan. 11 2016, Updated 3:16 p.m. ET

Sector performance

The following graph presents the price movement of the Financial Services Select Sector SPDR (XLFS), the Financial Select Sector SPDR ETF (XLF), and the PowerShares DB US Dollar Bullish ETF (UUP) since December 2015.

From the graph, we can see that in some cases, with the rise in the US dollar, XLFS and XLF tend to fall. This financial services sector comprises both highly volatile and less volatile stocks. The beta values for these stocks ranges from 0.63 to 1.67. A beta value less than 1 implies a less volatile stock while values greater than 1 point to stocks that are sensitive to broad market movements and more volatile. With a downward broad market movement on January 8, all the component sectors of SPY ended in the red. The movement in the stocks’ prices was more out of panic and emotions of concern.

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Why did the financial services sector lost the most in SPY?

On Friday, the US dollar jumped 0.2%, owing to the US jobs report. The strong labor market suggested a possibility of a rate hike in March 2016. A rise in the US dollar tends to increase borrowing costs, which generally benefits lending banks, increasing their profit margin. However, many of these banks raise capital and offer mortgages, brokerages, and insurance. Other than banks, many other financial companies provide these financial services.

Now, when borrowing costs increase, financial activity tends to slow. Capital becomes expensive, so the companies that thrive on revenues through fees and commissions are affected. On January 8, investors could have anticipated the likelihood of the rate hike, owing to the strong labor report coupled with the rise in the US dollar. So bank stocks—namely, Bank Of America (BAC), Citigroup (C), Goldman Sachs (GS), J.P. Morgan Chase (JPM), Morgan Stanley (MS), and US Bancorp (USB)—fell 1.9%, 3.0%, 0.4%, 2.2%, 2.1%, and 1.4%, respectively, on January 8.

Let’s look at the key stocks of the SPDR S&P 500 ETF (SPY) on January 8 in the next part of this series.


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