Smart Money Option Traders Position for Rotation to Financial Stocks / Sector
Financial stocks, Banks and Insurance in particular, have been one of the places to avoid during this multi-year bull market. Those sectors were amongst those lagging the most… and they offered very little in terms of revenue growth. The SPDR Financial Sector ETF (NYSEARCA:XLF) is still 40% below 2009 highs and the Bank ETF (NYSEARCA:KBE) is down nearly 50%.
But let’s dig in to the Financial Sector and select financial stocks to see why things may be turning a corner.
The Banking ETF (KBE) has 65 holdings with an average PE ratio of 12.65X, Price/Book ratio of 0.97, yields on average 2.23%, and forecasts 8.6% EPS growth the next 3-5 years forward. For reference, Banks were trading at an average PE of 26X Earnings in January 2008. It is no wonder why the group trades at such a low multiple to other sectors considering the historically low interest rates, as Banks’ earnings are directly correlated to the Federal Funds rate. A rising rate environment also correlates with a strong economy, and translates to rising loan demand, and greater profitability on loans. The Fed has been very hesitant to raise rates since coming out of the “Great Recession”, and though the path to higher rates is very likely to be gradual, the trajectory is higher, and this should put Banks back in favor after spending years in the doghouse.
In the past week I have seen multiple large January 2018 out of the money call purchases across the Financial sector, looking to take advantage of the cheapness of upside calls (skew). This usually occurs when smart money is positioning for a trend move. Another potential factor for outperformance is that in the later innings of a bull market, and we clearly are in one of the longer ones right now, there will be a natural rotation to value from growth, which the Banks offer.
The recent trades in select financial stocks include:
- MetLife (NYSE:MET) – On 7/13 the January 2018 $52.50 calls were bought to open 10,000X at $1.10 to $1.13 and on 7/14 the January 2018 $47.50 calls were bought to open 5,000X at $2.80
- Travelers (NYSE:TRV) – On 7/19 the January 2018 $135 calls were bought to open 3,280X at $2.60
- State Street (NYSE:STT) – On 7/13 the January 2018 $72.50 calls were bought 8,600X to open at $1.30
- CIT Group (NYSE:CIT) – On 7/18 the January 2018 $42 calls were bought to open 5,810X at $2.20
- Capital One (NYSE:COF) – On 7/13 the January 2018 $80 calls were bought to open 6,020X at $3.80
- Lincoln National (NYSE:LNC) – On 7/19 the January 2018 $55 calls were bought to open 5,620X at $2.30
- Schwab (NYSE:SCHW) – On 7/8 the January 2018 $40 calls were bought to open 14,280X at $0.50
Interestingly, each of the trades except MetLife (MET) took place at the PHLX. In total, this is just over $10M worth of January 2018 OTM calls bought in Financials in the past week.
Looking at the Banking ETF chart (KBE) it recently held monthly cloud support right at trend support off the 2009/2011 lows, and also retested a former 2013 breakout level at $28.
These positions tell me that it may be time to take a closer look and start putting some money back to work into the Banks and Insurance stocks. I will continue to monitor to see if this trend continues into other names with interest rate sensitivity.
Thanks for reading.
Author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.