Trading By the Numbers: 3 Too Hot to Handle Financial ETFs

With strength in financials helping push broad-based index ETFs like the SPDR S&P 500 Trust ETF (SPY) to its most extreme levels since early August, it is clear just how much negativity had been built into the group.

A combination of aggressive short-covering and speculative buying has sent financial stocks higher to start the trading week. And this buying has driven many of the most widely-traded financial and banking-related exchange-traded funds to levels from which they have typically tended to underperform, if not reverse and move lower.

The “Poster-ETF” for this development is the Financial Select Sector SPDRS ETF (XLF). XLF has closed higher for three days in a row, up more than 2% on Monday alone and finishing in overbought territory for each of the past three trading sessions. Heading into the close on Monday, the fund was one of the lower rated ETFs in our database, earning a “consider avoiding” 2 out of 10.

Also earning a “consider avoiding” 2 out of 10 ahead of trading on Tuesday was the iShares Dow Jones U.S. Financial Sector Index Fund ETF (IYF). Like XLF, IYF has closed higher for three days in a row beneath the 200-day moving average, though with the most recent two closes in overbought territory as opposed to all three.

Traders and active investors looking to take a more aggressive positioning with regard to increasingly overbought financials may want to also keep an eye on the Direxion Financial Bear 3x Shares (FAZ). FAZ dropped by well over 6% on Monday in response to continued buying in the financial sector. But the continued selling has helped the 3x leveraged ETF earn a sizable upgrade to 9 out of 10 late in the session, putting FAZ among the highest rated leveraged funds heading into trading on Tuesday.

The ETFs and leveraged ETFs in today’s report were drawn from the data and research available through PowerRatings. To find out more, click here.

David Penn is Editor in Chief of