Eye On Financials: XLF, Immediate Term View

I am getting a lot of great questions on this topic today. The US Financials are flashing a positive divergence relative to the SP500, with the XLF (financials etf) trading +1% in a down -2% tape.

The “shark line”, as we like to call it, for the XLF lies overhead at $12.77. All of the panic covering underneath that line is not particularly relevant data in my macro model. If the XLF fails to overcome and close above the shark line, there is an immediate downside strike of $10.55 in play – that’s -12% lower.

In terms of US Financial stocks, we covered our short position in Morgan Stanley (MS) on Monday 12/1/08 at $12.36/share. Away from my long standing core thesis that the legacy full service brokerage/investment banking/research model is broken, currently we are short Bank of America (BAC), for three reasons: 1. The BAC Bailout Merrill deal getting approved (bad) 2. This week’s flattening of the US yield curve (bad for returns long term; think Japanese banks), and 3. Complacency (short interest is shockingly low at less than 2%).

KM