One banking ETF tends to outperform in December
Lost in the headlines of the energy sector breakout is the quietly brilliant year bank stocks have had. At last check, the Financial Select Sector SPDR Fund (XLF) exchange traded fund (ETF) is up 30% year-to-date, the fourth-highest return of the ETF's we track. Financials got their latest leg-up after a string of encouraging third-quarter earnings results; per AP, "four of the largest U.S. banks said their profits grew by double-digits last quarter, as a healthier U.S. economy has helped reduce the number of loans in default or that the bank won’t likely recoup." Can the resurgent sector stick the landing in 2021?
If past is precedent, bank stocks can finish the year strong. With a little over a month left in 2021, data compiled by Schaeffer's Senior Quantitative Analyst shows bank stocks tend to historically outperform the final month of the calendar year. In the last 10 years, XLF boasts an average December return of 0.65% and finished the month positive 80% of the time. That's good for fourth-highest of the ETF's tracked, and the sectors that outpace it are, shall we say, quite niche; metals non-ferrous, media, and the leisure.
Looking at individual equities, bank or financial services stocks accounted for 10 of the 25 best-performing stocks in December on the S&P 500 Index (SPX) in the last 10 years, according to White. This includes heavy-hitter names JPMorgan Chase (JPM) and Morgan Stanley (MS), as well as smaller, more specialized services such as Keycorp (NYSE:KEY) and Regions Financial (RF). Plus, not a single bank stock appears on White's opposite list, the 25 worst-performing SPX stocks for December.
KEY is worth a closer look. It's average December return the last 10 years is a modest 2.2%, but it's one of two stocks with a 90% win rate. Plus, the stock also just showed up on one of White's quantitative studies of historically bullish trendlines. KEY has shed 0.5% in November thus far, a pullback that's taken the stock within one standard deviation of its 40-day moving average. According to White, eight similar pullbacks have occurred in the last three years, in which KEY averages a 3.7% return one month later, with five out of eight returns ending in positive territory.
Several other contrarian signals are bubbling over with KEY. Options traders appear quite enamored with puts. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Keycorp sports a 10-day put/call volume ratio of 2.70, which ranks in the 93rd percentile of its annual range. So not only do puts nearly triple the amount of calls traded in the last two weeks, but the high percentile indicates the rate of put buying relative to call buying has been quicker than usual. Echoing this, KEY's Schaeffer's put/call open interest ratio (SOIR) of 0.91 sits in the 87th percentile of its annual range, indicating that near-term traders have rarely been more put-biased in the past 12 months.
Prospective options traders should be mindful of potential headwinds swirling. The renomination of Fed Chair Powell gave the sector a boost, but any central bank steps taken to curb inflation could put a damper on bank stock momentum. Plus, the new Covid variant that rattled investors' cages on Friday could throw a wrench into the whole operation and send interest rates pivoting lower. With such uncertainty ahead even in the face of historically bullish seasonal statistics, its best to remember the flexibility options offer. Using call options in lieu of buying stock outright allows one to put less dollars at risk relative to equities, while the leverage allows you to achieve the profits you are seeking. Or you could hedge a long position with puts, allowing macro events to unfold without putting your portfolio at major risk.
Subscribers to Chart of the Week received this commentary on Sunday, November 28.