Using Volume In ETFs To Find Trading Signals In Financials

Includes: FAS, FAZ, SKF, UYG, XLF
by: Francis Fiduk

Volume is a personal favorite metric of mine when determining the direction a stock price will take. It can help identify strength, weakness, and breaks in trends. I find using leveraged ETFs to be good indicators for this because of the increased losses one could face when trading these instruments. Likewise, these ETFs are excellent for hedging trades, so a sudden increase in one of these ETFs could signal a lot of hedging is going on due to uncertainties.

Financials have been getting more attention than usual lately, so I decided to see what, if any, volume indicators I could find.

I first looked at the leveraged financial ETFs: Direxion Daily Financial Bull 3X Shares (NYSEARCA:FAS) Direxion Daily Financial Bear 3X Shares (NYSEARCA:FAZ) ProShares Ultra Financials (NYSEARCA:UYG) ProShares UltraShort Financials (NYSEARCA:SKF). When building these charts, they can be difficult to read for many reasons. For example, the adjusted price in FAZ was over $8000 per share at one point. I modified the share price by a percentage so that they would line up better (meaning the values in the charts below ARE NOT their actual price, rather they reflect how the charts would look if they were similarly priced). I also converted volume into a percentage so that it filled the graph.

(Click to enlarge)

(Click to enlarge)

Looking Back:

The first thing I noticed is the sudden increase in volume in FAZ and SKF, this started on February 25th 2011. I tried digging into some old news to find what caused this steep increase in financial bear ETFs, but I could find nothing conclusive. What is evident from February 25th is the steady decrease in financials since that point. This resulted in about a 50% gain in SKF and a 70% gain in FAZ.

Between mid July 2010 and October 2010, volume steadily increased, then held steady until March 2011. This corresponded with gains of about 35% in UYG 75% in FAS from December 2010 to mid February 2011.

You’ll also notice on April 16th 2010, the massive spike in SKF, and spike in UYG. For the next two months financials fell. This resulted in about a 40% gain in SKF and a 63% gain in FAZ.

Looking Ahead:

UYG/SKF volume appears to suggest bullishness since about mid August. On the other hand, FAS/FAZ volume initially appeared bullish as well, but went bearish again. Signals from these seem mixed, but leaning bearish.

When looking at Financial Select Sector SPDR (NYSEARCA:XLF), volume appears slightly bullish, but nowhere near what we saw in 2008 when financials were last at rock bottom prices.

XLF Chart
(Click to enlarge)

Conclusion: Generally speaking, financials are at the cheapest they’ve been in 2 years. Because of this, we should be seeing significantly increased volume if institutions expected a bull market. However, there has only been slightly increased volume which is more reminiscent of 2008 in the midst of everything collapsing. Should financials truly be ‘on sale’ expect an ETF like XLF to increase to 150-200 million shares traded per day on average. For now, you should remain cautious if you are long financials.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.