Time To Short The XLF And Go Long Consumer Staples? (XLF, MCD, WMT, PEP)

The trend right now in the markets is disconcerting, but fairly defined at this point - the trade is "risk off," and if this atmosphere persists, traders are not likely to make money without having significant short exposure. The Financial Select Sector SPDR ETF XLF appears to be a good place to start when looking for short opportunities. The global markets are filled with uncertainty right now, as fears about the Gulf oil spill, a double dip recession in the United States and European debt contagion have taken over the headlines. One place that prudent investors are likely to continue to avoid, as uncertainty continues to swirl, is the financial sector. Wall Street basically imploded in 2008 as a result of excessive leverage in the financial system, less than adequate risk controls, and a loss of confidence. These memories are still very much imbedded in the psyches of decision makers in the investment community. Big banks' balance sheets are still extremely opaque, and investors are still grappling with what these firms' business models will look like in the absence of government liquidity injections and special stimulus packages. There is also tremendous fear over what their exposure to the European sovereign debt crisis looks like. Furthermore, the financial sector faces headwinds from FinReg, the housing market, populist sentiment, and the fallout from the Goldman Sachs GS fraud charges. Investors are scared, and only the biggest risk takers are likely to be willing to lay down outsized bets on this sector right now. Over the last 3 months, the XLF has fallen 8.85% compared to 7.38% for the SPDR S&P 500 ETF SPY, a spread that could get wider. Obviously no one can predict with complete accuracy if the "risk off" trade will continue throughout the summer, but that is certainly the identifiable trend right now. If you are interested in betting that this will continue, consider shorting the XLF and buying a high quality, defensive name against that short position. Defensive names that look attractive at current levels include McDonald's MCD, Pepsico PEP, and Wal-Mart WMT. If you are tired of waking up to a sea of red in the markets, this trade should profit, if the terrible price action in stocks continues.