This week we considered a position on the XLF, the Financial Select Sector SPDR. But before deciding whether to enter a trade, we needed to sneak a peak behind the XLF in order to view its consituent components and hence discover whether the reward to risk ratio might be attractive at this point in time.
The first step in uncovering the XLF is to discover the primary holdings for the Select SPDR. Yahoo! Finance reports that the top 10 holdings are:
American Express (AXP) – 2.48%
American International Group (AIG) – 5.95%
Bank of America (BAC) – 8.84%
Bank of New York Mellon (BK) – 2.5%
Citigroup (C) – 5.93%
Goldman Sachs (GS) – 3.38%
JP Morgan Chase (JPM) – 6.84%
US Bancorp (USB) – 2.77%
Wachovia (WB) – 3.03%
Wells Fargo (WFC) – 4.94%
Looking at some of the major holders in some more detail, we can find out even more about the XLF. Let's start with American Express.
American Express started an uptrend in March and so far the uptrend has remained intact despite the most recent correction in the market and in financials on the whole. That's a good start if we're considering a bullish thesis on the XLF.
AIG has had its share of woes lately, but late in the week received an upgrade from Morgan Stanley citing the most recent correction as being 'overdone'.
Certainly from a reward to risk perspective, AIG is looking attractive as a longer term play. 2-0 for the bulls.
If good companies trading at multi-year lows based on dismal sentiment constitutes good reward to risk ratios, then Bank of America is a contender for the prize ceremony.
Bank of America is now trading at 4-year lows. If ever there was a time to speculate on BAC, now might be it!
Next on the list is a top-performer in the group, Bank of New York Mellon, which has maintained tremendous chart strength in the face of what could be described as a sector collapse earlier in the year.
Nothing for the bears to grab hold of here, 4-0 to the bulls!
And onward to the famed Citigroup. Probably it's best to let Phil and Meredith Whitney take this one to round 12. We side with Phil on this one, as well as some top-rated analysts who predict the probability of a rosy future is much greater than a stormy one for Citigroup.
Another component of the XLF that has been solid as a rock this year has been US Bancorp. No words needed here, the chart illustrates the strength.
And how can we forget Goldman Sachs? Anybody daring to short Goldman should do so at their peril. We will notch Goldman up as another component that offers attractive reward to risk potential.
And we will wrap up this chart section by looking at JP Morgan. JP Morgan obviously got a deal on Bear Stearns, so trading around the levels it was at immediately after the deal was announced and subsequent to the pullback from the initial exuberance appears highly attractive too.
Putting all the pieces together, we arrived at the conclusion that the reward to risk ratio for the XLF at this time favors the bulls. Obviously, there is no guarantee how the XLF will move in the next day or two or three, but in the longer term we are comfortable with executing a bullish trade at this time.
For details on our Target Exit Point and Contingency Exit Plan as well as specifics on the trade itself, please refer to this week's Trade Alert.
Have a fantastic week!
Optionsage @ StockandOptionTrades
