Talking Numbers

Why it could get ‘really challenging’ for this sector

Why it could get 'really challenging' for this sector

Banks are having a tough time making money trading money.

Speaking to a conference, Citigroup CFO John Gerspach said, "We currently expect total trading revenues for equities and fixed income to be down in the range of 20 percent to 25 percent year over year."

Gerspach blames lower market volatility and geopolitical uncertainty for driving down trading volumes and thus revenues for Citigroup. Earlier this month, JPMorgan Chase warned in its SEC filings that its fixed income and equities trading businesses will also face a crunch, writing:

"Based on Markets revenue results to date, which reflect a continued challenging environment and lower client activity levels, expect 2Q14 Markets revenue to be down approximately 20%+/- versus 2Q13. The Markets revenue actual results will depend heavily on performance throughout the remainder of the quarter, which can be volatile."

Investors thus far don't seem too worried about these disclosures. Both Citigroup and JPMorgan Chase are trading right around where they were at the beginning of the month.

(Read: Citigroup sees Q2 markets revenue down as much as 25%: CFO)

"The market is underreacting to this news," said Gina Sanchez, founder of Chantico Global. She said that banks had a tough time even with the Federal Reserve's massive bond-buying stimulus.

Banks have been "dealt a lethal combination" of low volatility, macroeconomic uncertainty and geopolitical tensions, said Sanchez, a CNBC contributor. "That combination spells trouble for trading volumes and that's the bread and butter for most of these banks. So, I think that this is going to be a really challenging time for big banks."

The technicals are also negative for the sector as a whole, according to Richard Ross, global technical strategist at Auerbach Grayson. Year to date, the financial sector in the S&P 500 has gained 0.8 percent versus the overall index's 1.4 percent.

"I'm not a big fan of the financials here," said Ross, a "Talking Numbers" contributor. "This is the second-worst performing major S&P sector, [having] very bad relative strength. That's your first clue."

(Watch: Obama administration sides with banks in Madoff case)

Charting the Financial Select Sector SPDR ETF (XLF), Ross sees reasons to be concerned. Though the XLF has stayed above its 200-day moving average since 2012, and successfully tested it twice this year alone, "you can see the highs are also coming in at lower levels, too," Ross said. "It's telling us that momentum and the trend is really rotating towards the downside."

Ross' longer-term chart of the XLF also shows the ETF formed a bullish head-and-shoulders bottom but has already hit its price target.

"We use the height of that pattern to give us that measured upside target," Ross explained. "The height of that pattern is $6. We take that $6 and we project it from the neckline, the breakout. That neckline comes in at $17. Plus $6, it gives us $23, if my math is correct. The stock topped out at $22.65. So, for all intents and purposes, you've reached your measured upside target."

"You have an early cycle group in the financials which is underperforming on a year-to-date basis," said Ross. "The fundamentals are deteriorating. … All of this tells me you want to be avoiding or selling financials at this point."

To see the full discussion on the XLF, with Sanchez on the fundamentals and Ross on the technicals, watch the above video.

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