Market Overview

Maybe It's Time To Be Bearish On Regional Bank ETFs

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Maybe It's Time To Be Bearish On Regional Bank ETFs

The financial services sector, the S&P 500's third-largest sector allocation, is the midst of its usual earnings avalanche and while the bank reports haven't been bad, there has been a familiar theme: companies guiding lower on net interest margins.

What Happened

Slack net interest margin guidance could be a sign that banks are baking in an imminent interest rate cut by the Federal Reserve. Regional banks are particularly sensitive to net interest margin weakness, perhaps explaining why the SPDR S&P Regional Banking ETF (NYSE: KRE), the largest exchange traded fund tracking the industry, is lower by 1% this week.

Additionally, some traders see a technical case for shorting the bellwether regional bank ETF.

On Wednesday, “the SPDR US Regional Bank ETF (KRE) confirmed a daily negative MACD crossover,” said Rareview Macro founder Neil Azous in a note. “A MACD crossover occurred 9 times over the last two years. In 8 of those instances, over the next 30 trading days, the average loss was 13.16%.”

Why It's Important

For traders willing to aggressively wager that KRE is poised to decline over the near term, the oft-overlooked Direxion Daily Regional Banks Bear 3X Shares (NYSE:WDRW) could be worth considering. WDRW is designed to deliver triple the daily inverse returns of the S&P Regional Banks Select Industry Index, the same index KRE tracks.

KRE and WDRW could be tested by earnings again next week. After more than 51% of the S&P Regional Banks Select Industry Index reported this week, that percentage is about 47% next week.

“If somebody needed a fundamental justification to execute the strategy, so far, the commercial bank reporting season has not indicated any pickup in net investment income growth due to the upcoming Federal Reserve interest rate cuts, loans continue to decline, and deposits continue to contract,” said Azous.

What's Next

WDRW fell 2.2% Thursday to close at $28.20, but if the bearish regional bank ETF can clear $30, upside from there could be significant. That break could happen if more banks warn on net interest margin during next week's earnings reports.

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