16 April 2008

XLF or UYG? - Fast Money Focusing on Financials

Apparently, Fast Money talked up the financials right when I started pondering 'em on Monday night:

On CNBC's "Fast Money" TV show, Guy Adami noted that Wachovia Bank (WB - Cramer's Take - Stockpickr) had cut its dividend. He said that previously, the bank had said there was no reason for it to cut its dividend, but that he has learned to be skeptical of what the CEOs of financial firms say. Despite the bad report, the stock is setting up for a trade on the long side with a tight stop.

Karen Finerman said she wouldn't go near the financials, but if she had to go one way or another, she would be long the sector.

Jeff Macke said that it might be worth it to buy Citigroup (C - Cramer's Take - Stockpickr) or the Financial Select Sector SPDR (XLF - Cramer's Take - Stockpickr) on dips.

Pete Najarian said that $24.50 is a level of support for the XLF. He said that because the fund reached that level today, he's rotating back into calls. He said there may be more room to the downside, but the $24-to-$27 range has been working in the XLF.

He said he wasn't sure about the prospects for Bank of America (BAC - Cramer's Take - Stockpickr) or Wells Fargo (WFC - Cramer's Take - Stockpickr). On the other hand, he said USBancorp (USB - Cramer's Take - Stockpickr) should be a good investment, even if it is a little more conservative and boring.

Adami said it's all right for investors to get long anything as long as they have a well-defined exit.

Not having watched the actual broadcast, all I can do is glean the Fast Money gang's sentiment from this recap. They seem wary of more downside, but are cautiously optimistic. The entry trade in the financials is "almost there." I can hear Porkins repeating, "Stay on target."

XLF is the sector-diversified choice for Macke and Najarian that will protect against individual names blowing up like the Death Star. Should I consider XLF instead of UYG?

Looking at data from Google Finance, I see that XLF has an average daily volume of 151M shares traded, versus 12M for UYG. Liquidity is good for both holdings, but XLF is clearly the preferred issue in the marketplace.

Over the past year, XLF has traded between $22.29 and $38.15 a share. The difference between the 52-week high and low is $15.86. If you divide that into the 52-week low value of $22.29, you'll get .71. In other words, XLF has traded at prices up to 71% off its 52-week low over the past year.

UYG has traded between $24.01 and $72.96 a share. The difference between the 52-week high and low is $48.95. Dividing that value into the 52-week low of $24.01 comes to 2.04. UYG has traded up to 204% off its 52-week low.

XLF looks good if you can't stomach the extra volatility. Volatility, schmolatility. On the next dip, Macke may buy XLF, but I'll be otherwise distracted by some ugly UYG.

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