Tuesday, March 11, 2008

Watching XLF Price and IV Action

The financial sector stock de jour is BSC today – unless of course it’s WM. With anxiety over ABK and MBI seemingly on the back burner at the moment and TMA and LEH suddenly so yesterday, which financial stock is going to set the tone for the market? My take is that since one tipping domino is unlikely to be contained, I am continuing to focus on the broad sector ETF, XLF.

Just a week ago today, I posted a one year chart of XLF showing price and implied volatility; in the interim, a great deal has changed, with the bears and the news flow dictating the action. From a technical standpoint, just yesterday XLF took out the 52 week high (47.99) in implied volatility from November 8th and the 52 week stock price low (24.11) from January 22nd. The chart below zooms in on the last six months and shows that yesterday’s selloff generated a new stock price low of 23.50 and IV high of 54.52 – a fitting tribute to the eight year anniversary of the NASDAQ all-time high.

Going forward it is important to watch the action in newsmakers like BSC and the other financial headline makers, but XLF is an excellent proxy for the sector and a good way to keep focused on the forest instead of the trees. Note also the action in the XLF calls for March, April and June, which shows some significant bets are being made that today’s XLF-led market bounce will not be a one day affair. No matter how things play out, XLF should be an excellent tell. I suggest you watch it as closely as you do the broader indices and keep an eye not just on the price, but also on the IV and put to call activity.

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