XLF downside to 28.50 over the next year?

5 feb

Why do I think XLF may be a potential short?

There are many economic catalysts this year:

• The Fed is monitoring interest rates and may still make adjustments. Some market consensus tools suggest 1-3 rate cuts this year (of 0.25% each), while some sources suggest that the economy is still resilient, and rates need to still be increased. Regardless of that, rates have historically been cut when something has broken and they need to re-stimulate the economy.
  
• NY Community Bank has a fair amount of toxic assets on its books. While it had plenty of cash last year and was able to bail out other regional banks, it also holds an amount of commercial real estate debt, which was issued when interest rates were much lower. A large amount of it comes due this year, and now they may have difficulty servicing it. This is one example of how the bank defaults have not finished happening, and that last year was only a temporary solution.
  
• Many large companies have recently posted massive layoffs, between 5 and 15% depending on the company. Most of it is in the tech sector. However, this indicates a slowing economy (despite recent numbers looking very good), and companies are proactively cutting the fat to save money. If they cannot grow their margins by increasing revenue, then they will look to cut costs. Commercial real estate is also likely to see a number of failures, for similar reasons (and this ties into the above reason).
  
• The 10Y and 2Y interest rate yield curve is still inverted. Historically, once it uninverts, rates tend to rise rapidly and the equity market trends downward sharply. This is very likely to happen again (there was only one time in the US where this was not true), but whether this occurs in a month, in a year, or in a decade is anyone's guess. But it is still a potential catalyst.
  

In light of the above reasons, one potential way to play the downside is to enter a bearish spread. I am choosing XLF specifically because it is a low volatility sector, which means that put contracts are much less expensive.

Around the 31.00 level, we see support and resistance from around the year 2020, breaching it in 2021, and finding support throughout 2022; it is natural, then, that this acts as a pivot that can be broken through in a bear market.

Using fibonnaci levels from the previous 2020 low to the all time high, we find the midpoint at 29.60, which is another possible level.

Finally, using ATR and projecting the sqrt(ATR x N), we can estimate roughly where the price might fall by a certain date. From the previous ATH, this gives us a range of 26 to 56 (approximately). From the current closing price, we get 32 to 46. However, going two units away (solid teal line) brings this to 25 on the low side. This overlaps towards the one-unit low range from the previous ATH.

If I had to pick a specific range for Jan 2025, I would estimate the bear case to be 27 to 29 dollars, based solely on market technicals.

25 jul

Nota

I should have used January 2nd as the starting date for all forward projections for the sake of consistency. Sorry!

But even so, using January 2nd, 2024, would put an upside of 45.19 and a downside of 30.13 ... Price has currently gone to the upside and broken out of 1x ATR and looks to have very good strength. Looks like this was a loser prediction.

Based on this week's price and ATR, I would suggest an EOY target of 41.46 to 43.88 with conservative movement, or as much as 37.56 to 47.78 if things get swingy.