XLF Lagging Market on Economic Worries, Headline Risk

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ETFs that invest in U.S. financial stocks have trailed the market since the mid-March bounce as the key sector hasn’t participated in the rally.

The Financial Select Sector SPDR Fund (NYSEARCA:XLF) has been languishing below $17 a share and isn’t getting a boost with Bank of America (NYSE:BAC) and J.P. Morgan (NYSE:JPM) kicking off the earnings season this week for banks. Worries that Goldman Sachs (NYSE:GS) may face government charges after a scathing Senate panel report this week is an example of the headline risk surrounding bank stocks after the financial crisis.

Meanwhile, economists at these very same big banks are cutting back their growth forecasts for the U.S. economy. “This week started off slowly in terms of economic data, but what data we did get was mixed at best,” wrote analysts at Think 20/20 in a report Friday. “A more sober perspective, however, would say that the most recent figures, when coupled with those over the past few months, imply that the country’s rate of economic growth has slowed in recent months.”

Additionally, “as the full impact of higher gas and food prices is felt, growth could be restrained in the near term,” they noted.

On Friday, the Labor Department said the Consumer Price Index (CPI) rose by 0.5% in March.

“Given the souring tone, it’s not surprising that we have started to get downward revisions to economic growth expectations for the quarter that ended in March,” Think 20/20 said.

From a technical standpoint, Financial Select Sector SPDR Fund has failed two attempts since the beginning of 2010 to make a sustained push over $17 a share.

The financial sector “is not participating in the recent rally,” said Peak Theories in a recent note.

“The question from here, then, seems to be one of whether the Financial Select Sector SPDR Fund (XLF) will rise up to meet the S&P 500, helping its rise in part due to the heavy financial composition of the S&P, or whether the S&P might decline to meet the XLF,” Peak Theories asked at the time. “The other possibility, of course, is that the two could trade separately with the S&P outperforming this time, but the S&P seems unlikely to move too high without the participation of the financials.”

Financial Select Sector SPDR Fund

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