NEW YORK (
) -- U.S. bank stocks held up well in the first half of the year, but they have slipped slightly so far in the third quarter. My analysis suggests investors should take profits in the financial sector.
One of the issues for banks in July was the record low yields on Treasuries. The yield on 10-year Treasury set an all-time low of 1.377% on July 25. These yields have hurt bank earnings, although yields in August are rising, reversing the trend.
Second-quarter earnings for U.S. banks were mostly in line with Wall Street estimates within the challenging environment of loan delinquencies in the mortgage market, and with overall tepid loan demand from both consumers and small businesses. We will learn more about these trends by the end of August when the Federal Deposit Insurance Corp. releases its Quarterly Banking Profile for the second quarter of 2012.
One of my benchmarks for the finance Sector is the
Finance Select Sector SPDR
, an exchange-traded fund that tracks 81 stocks. I will be focusing on the top 10 stocks by index weighting. Each has a weighting of more than 2%.
The financial sector is 6.9% overvalued fundamentally, according to
, which justifies some profit-taking.
The XLF traded to year-to-date high of $16.01 on March 27 and then declined 16.9% to the June 4 low at $13.30. Tuesday's high at $15.06 is up 13.2% from the June 4 low and down 5.9% from the March 27 high.
The daily chart below shows that XLF ($14.93) has a positive but overbought daily chart profile with the ETF above its 21-day, 50-day and 200-day simple moving averages at $14.57, $14.46 and $14.25, respectively. Another warning is that I do not have a nearby value level with my weekly pivot at $14.99. My quarterly and annual risky levels are $15.50 and $15.59, respectively.