XLF Volume Spikes 3.3 Standard Deviations Above Mean Yesterday

If I could pick only one ticker to watch in order to gauge the market’s health in the current environment, it would probably be XLF, the most popular of the financial sector ETFs. You could make an argument for RKH, the regional bank ETF, XBD, the broker dealer ETF, or any number of others, but XLF covers the entire financial sector, from Allstate (ALL) to Zions Bancorp (ZION).

With all the talk about the degree of a VIX spike needed to signal a bottom and other measures of capitulation, I am surprised I have not heard anyone else mention the volume in XLF yesterday. As shown in the graphic below, XLF traded over 469 million shares yesterday, eclipsing the previous volume record (set just last Friday), by over 150 million shares. The 469 million share turnover also represents 3.3 standard deviations above the mean, which translates into an extremely unlikely event. [Note that in the chart below, the Bollinger band settings for volume are for 3 standard deviations instead of the default 2 setting] This is capitulation-level volume in the sector that is most important to the stock market at the moment. If XLF can weather all the financial sector earnings due out tomorrow, I suspect that a bottom will be in for the financial sector.

Click to enlarge:

Comments

[rohum:]

excellent observation and very sound reasoning...I agree

2008 Jul 16 03:49 PM

[jimfin64:]

Bill Luby has made a great point the financial press has apparently overlooked for the moment. I would add to this that Goldman Sachs (GS) has taken off today. The "big boys" there always know something the rest of us don't. They are a day ahead and inside. GS is a bellweather stock, short term, of which direction the market is taking. The one thing the "big boys" there can't resist is making money off their own company. Keep an eye on GS for a good short term indicator. Also, as it rises ahead of the market over time, load up. Watch GS when it hits a new low, check its for volume the next day. Today is an example. As the market recovers GS wil be a great stock to own.

2008 Jul 16 03:57 PM

[User 68127:]

Well, you certainly nailed it for at least one day!

2008 Jul 16 03:58 PM

[StupidityAn...:]

Yippie!!!!!!!!!!! It's all over and everything is OK. The easy money is back to stay. Time to buy the XLF.

2008 Jul 16 04:03 PM

[DaveW:]

Actually, another author DID write about the XLF volume yesterday (7/15/08):

seekingalpha.com/artic...

2008 Jul 16 04:57 PM

[Archman Inv...:]

Deviations, smeveations, whatever.

Yes, there can be a discounting mechanism, etc.

However:
Loan losses keep coming.
Leveraged products tied to those losses are still at 20:1.
No one really knows what financial companies really have on their books.
They dont even know.
Alt-A, & prime losses are increasing.
HELOC losses just getting started.
Credit card losses just getting started.
Even WFC regardless of their so called "good earnings" now have provisions set aside to the tune of 7 Billion dollars in losses.

The "bottom" will be a process of phony up days like today, then down days. I have heard talk from some well respected market watchers (i think there might be one or 2 left) that have said even after a "bottom" the financials could take years to really repair all the damage before they begin a new bull market.

If anyone thinks they misses the "big one" today, guess what?
You will get another chance before you know it.

2008 Jul 16 05:04 PM

[Jerlad:]

Volume reversals cannot be gleaned from ETFs or ETNs. That's because they show activity in the FUND, not the underlying equities. Price is ok (especially for the larger ETFs because of there high liquidity) but volume? Sorry guys - no way.

A company's stock (or an index, if volume is available) is far better for volume reversal analysis.

I trade ETFs but I only look at price. I haven't done as well as with actual companies because my timing has sucked so far.

2008 Jul 16 05:49 PM

[CLH:]

Luby---Great post!!!!!

2008 Jul 16 08:56 PM

[buyitcheap:]

This is just a countertrend bounce which will trigger some significant shortcovering over the next few days, S&P could get back to 1300, but its just a bounce to sell into imho.

2008 Jul 16 09:15 PM

[Frank P:]

This type of logic is similar to how they came up with these mortgage pools. There's a lot of reasons why the volume might increase or change that make the statistics suspect. This XLF wasn't around during the last banking crisis so your data is made up of a slow period. This type of statistics can be helpful but you have to look at the reasons why banks were weak, which is because of real estate problems and over leverage. The crisis is over when these issues begin to resolve and that isn't happening. Wells Fargo changed their rules to put off problems which means they are going to get worse.

2008 Jul 16 09:26 PM

[User 192857:]

This is exactly what happens when politicians get their hands into the economy, which they least know of. But they love to make statements.

Artificial propping is not going to change the status of the real economy of the world and in particular US.

This is no bottom my friend......whole world was short in financial and it is no more than spike to cover them. It may last few days but
the drop is also going to be hard and deep.

2008 Jul 17 08:55 AM