The Xchange Blog

Why Financial Stocks are Poised for a Breakout. Maybe.

With the flow of Q1 earnings slowly winding down to a trickle, 2018’s first earnings season proved just as strong as those that preceded it. This season was marked by a higher-than-average trend of companies beating analyst estimates and positing strong fiscal-year guidance. Companies with guidance above consensus were more than twice the amount of companies who lowered their outlook. But so far, traders have met the increased profits with caution, or taken the pattern of corporate successes as a signal to shrink some of their exposure to financial stocks.

For example, the big banks, kicked off this season through the first few weeks of April by posting a string of top-line beats across the board. Reports from JP Morgan, Wells Fargo, Citigroup and Bank of America all posted stronger than expected revenue and each except JPMorgan  beat consensus EPS estimates by 4 percent or more. Further, because of the heightened forecast on interest rates and bond yields, the large banks might seem like a clear pick for traders betting on post-growth economic activity.

Despite the beats, bank stocks failed to either attract or hold on to investor attention. You can see the lack of enthusiasm on the street in the chart for the Direxion Daily Financial Bull 3X Shares ETF, which contains those stocks as some of its largest components.

FAS and FAZ vs. Russell 1000 Financials Index

Data Range: 2/14/2018 – 5/14/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. For standardized performance and the most recent month-end performance click here.

 

The street’s reticence isn’t entirely ill-founded. This earnings season did come in the wake of a couple major market corrections and also began in the midst of escalating tariff negotiations between the U.S. and China which could spell trouble for borrowers in the agricultural industry. Domestically, there is also the question of whether consumers will be able to afford to borrow as housing prices continue to rise to new heights in the midst of huge demand and credit card charge-offs rise to a six-year high.

However, 2018 has produced signals of greater corporate lending while interest rates are still relatively low. Whether this is the beginning of a longer trend of borrowing or the last rush to capture sub-two percent, is yet to be determined.

While the fundamental outlook on these banks may be mired in political and economic experimentation, another part of the financial sector could see an uptick in investor interest: their regional cousins. The Direxion Daily Regional Banks Bull 3x Shares ETF gained about 16 percent over a month’s time.


DPST and WDRW vs. S&P Regional Banks Index

Data Range: 4/13/2018 – 5/14/2018. Source: Bloomberg. Past performance is not indicative of future results. One cannot invest directly in an index. For standardized performance and the most recent month-end performance click here.

 

Earnings results from regional banks like Cullen Frost, Texas Capital, BB & T and Fifth Third Bank have shown a strong trend toward increasing corporate and individual loan accounts, a tactic helped by legislation under consideration that would ease Dodd-Frank lending restrictions and stress tests put in place after the 2008 financial crisis. Many have already anticipated the actual impact of these changes. However, Fifth Third credited its strong Q1 to its efforts in building those accounts.

Still, negative catalysts ranging from slow wage growth, to continued uncertainty surrounding global trade and America’s place in the global economy stand to make any long-term picture on financials murky at best.

Either way, Direxion has tools for both sides of the trade.

Related Leveraged ETFs:

 

 


These leveraged ETFs seek investment results that are 300%, -300%, of the return of their benchmark index for a single day. The funds should not be expected to provide returns which are a multiple of the return of the benchmark’s cumulative return for periods greater than a day. Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.
 
Direxion Shares Risks – An investment in the ETFs involves risk, including the possible loss of principal. Each ETF is non-diversified and includes risks associated with an ETF concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Each Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of their underlying index for periods other than a single day. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, for each Bull Fund, Daily Index Correlation/Tracking Risk and Other Investment Companies (including ETFs) Risk, for each Bear Fund, Daily Inverse Index Correlation/Tracking Risk and risks related to Shorting and Cash Transactions.  In addition to these risks, there are risks associated with an ETF’s investment in a specific industry, sector, geographic region or stocks that comprise each Fund’s underlying index. Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.