Bank of America, Citigroup Lead the Markets Lower

If you want to know why the S&P 500 is trading lower on the first trading day of the week, look no further than the aggressive selling in the financials.

Shares of both Bank of America (NYSE: BAC) and Citigroup (NYSE: C) pulled back sharply in Monday’s trading. BAC sold off by more than three percent, closing lower for the third day in the past four and trading to new, two-week lows. Down four in a row, shares of C pulled back by more than two percent on Monday to finish technically oversold for a third day in a row.

For both stocks, the current pullback represents the first major wave of selling since the stocks climbed back into bull market territory in the mid-February. Particularly strong buying in March helped send Bank of America and Citigroup to new, 6-months highs, and it is this achievement that has brought out the profit-takers – and not a few short-sellers – on the eve of earnings season.

Heading into trading on Tuesday, Bank of America have earned a positive edge of more than 1% in the short-term. Citigroup shares, on the other hand, have an even larger short-term edge of well over one and three-quarters percent as of Monday’s close. Both Bank of America and Citigroup earned “consider buying” ratings of 8 out of 10 early in the trading day.

Traders looking to avoid single stock risk have a variety of exchange-traded funds to choose from – most of which are as extremely oversold as the stocks in their holdings. The most widely-traded alternative, the Financial Select Sector SPDRS ETF (NYSE: XLF), has closed lower for four days in a row, the last three in oversold territory, after pulling back by nearly one and a half percent on Monday. The ETF earned an intraday, ratings upgrade to 10 out of 10, putting the fund at the top of our “consider buying” category of ETFs that have pulled back to levels where, historically speaking, the fund has been able to coerce buyers to come off the sidelines.

There are leveraged ETF markets, as well, that traders and more active investors may want to consider given the extreme nature of the selling in this sector. Both the ProShares Ultra Financial ETF (NYSE: UYG) and the Direxion Daily Financial Bull 3x Shares (NYSE: FAS) have closed down for four in a row and are trading at technically oversold levels ahead of Tuesday’s open. Like XLF, both UYG, which is a 2-to-1 leveraged ETF, and FAS, which is a 3-to-1 leveraged fund, have earned our highest, “consider buying,” rating of 10 out of 10 as of the end of trading on Monday, and will open with significant, short-term edges when trading begins Tuesday morning.

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David Penn is Editor in Chief of