This series analyzes investor sentiment in regards to the financial sectors in the United States, Europe, China, Japan, and the emerging market economies. We will study these factors using technical indicators such as moving averages, relative strength index, and fund flows. For additional in-depth coverage of the financial sector, please visit Market Realist’s Financials page.
Since the beginning of 2016, global markets have been on a roller coaster ride due to plunging commodity prices and slowing economic growth. To fight stagnation, a number of developed economies like Japan, Europe, Switzerland, and Sweden have adopted a negative interest rate policy. Predictably, this has impacted fund flows to these economies.
Overview of XLF
The Financial Select Sector SPDR ETF (XLF) attracts the most attention among financial ETFs in the US, primarily because 87% of the fund is composed of large-cap stocks. With a market capitalization of $15.1 billion as of February 19, it is the largest financial ETF.
It is also the most liquid financial ETF with $79 billion worth of shares trading every day. The largest holdings of this ETF are Wells Fargo (WFC), Bank of New York Mellon (BK), JPMorgan Chase (JPM), and Bank of America (BAC).
On February 19, the Financial Select Sector SPDR ETF (XLF) closed at $20.98. This is 10% and 6% below its 100-day and 50-day moving averages, respectively. However, XLF is currently trading 0.3% above its 20-day moving average.
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 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 XLF rose above its 20-day moving average on February 17. Technical analysts view such crossovers as bullish signs.
Relative strength index
The relative strength index is a technical indicator that is used to study overbought and oversold levels of a stock. Generally, if the RSI is above 70, it indicates the stock is overbought. An RSI figure below 30 suggests that a stock has been oversold.
In the chart above, we can see the 14-day RSI for XLF was 46.2 on February 19, suggesting it is nearing oversold levels, but still far from being considered undervalued. Read on for more analysis on fund flows to the XLF ETF.