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Financials Could Be Setting Up For a Major Pullback Soon

Financials continue to be in the spotlight, thanks to their performance since Trump’s election last November but it seems that some market participants are wagering that the sector may be due for a pullback.

While about a month ago or so, we saw nothing but positioning for more upside via calls in XLF (SPDR Financial Select Sector, Expense Ratio 0.15%, $25.4 billion in AUM), lately the options flows have been riddled with downside put buyers in spring months (April and May),as well as some upside call selling in April (specifically the April 25 strikes were active last week).

Year-to-date, XLF has still seen strong inflows with more than $1.3 billion entering the fund via creations, but the fund has had trouble eclipsing and holding the $25 mark in recent sessions.

Given the recent bearish appetite expressed in the options markets, including both put buying and spring time upside call selling, it makes sense for us to look closely at “Bear” products that traders and hedgers traditionally use when speculating on downside in Financials. These funds include FAZ (Direxion Daily Financial Bear 3X, Expense Ratio 0.95%, $249 million in AUM) and SKF (ProShares UltraShort Financials, Expense Ratio 0.95%, $42 million in AUM,  which are well off of peak asset levels presently due to the bullish environment that has ensued in Financial equities for at least the past five months.

The Financial Select Sector SPDR Fund (NYSE:XLF) was trading at $24.76 per share on Monday afternoon, down $0.21 (-0.84%). Year-to-date, XLF has gained 6.49%, versus a 6.25% rise in the benchmark S&P 500 index during the same period.

XLF currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 38 ETFs in the Financial Equities ETFs category.

About the Author: Paul Weisbruch

paul-weisbruchPaul Weisbruch is the VP of ETF/Options Sales and Trading at Street One Financial. Prior to joining the team at Street One, Paul served as the Director of RIA and Institutional ETF Sales at RevenueShares ETFs from December 2007 until November of 2009. Before RevenueShares, Paul was employed by Susquehanna International Group from 2000 until 2007 serving in roles including OTC/NYSE Institutional Block Trading, Nasdaq/OTC Market Making, ETF/Derivatives Intelligence and Strategy, Algorithmic Trading, as well as acting as the PHLX Floor Specialist in the ETFs, SPY and DIA.Paul has been actively involved in the ETF space from both a product and trading standpoint since 2000. Additionally, Paul has well forged relationships with national RIAs, institutional pension fund managers and consultants, mutual fund and hedge fund managers, and also the ETF media. Co-authoring the “S1F ETF Daily” since 2009, the daily piece has become a must for many portfolio managers in the ETF space, with segments regularly appearing in the likes of Barron’s, WSJ, and for instance.

He holds his Series 4 (Registered Options Principal), 6, 7, 55 (Equity Trader), 63, and 65 licenses. He graduated from the University of Pittsburgh (B.S. – Economics), graduating magna cum laude, and has an MBA from Villanova University.

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