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Big Earnings Week Looms One of 2018's Most Disappointing Groups

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Big Earnings Week Looms One of  2018's Most Disappointing Groups

Last year, the Federal Reserve raised interest rates four times, but the S&P Regional Banks Select Industry Index (SPSIRBKT), a widely followed gauge of regional bank stocks, plunged 19 percent.

So it is safe to say regional banks were among 2018's most disappointing assets.

What Happened

In 2018, regional banks ran counter to a historically positive correlation to rising interest rates and Treasury yields as some investors fretted that the positive impact from rising rates was dwindling for bank stocks.

“US banks should begin to see less and less benefit to earnings from rising short-term interest rates over the coming quarters,” Fitch Ratings says. “Net interest margins (NIMs) have continued to expand on a year-over-year basis due to the ongoing ability to lag funding costs relative to loan and investment portfolio repricing.”

Investors souring on regional banks lifted the fortunes of the Direxion Daily Regional Banks Bear 3X Shares (NYSE: WDRW) for much of 2018.

Why It's Important

The bearish WDRW looks to deliver triple the daily inverse returns of the S&P Regional Banks Select Industry Index. While 2019 is still in its nascent stages, a case can be made that the bearish regional banks trade was overcrowded entering the year.

The S&P Regional Banks Select Industry Index is up nearly 14 percent to start the year while the bearish WDRW is lower by more than 33 percent. WDRW's bullish cousin, the Direxion Daily Regional Banks Bull 3X Shares (NYSE: DPST), is up 42.7 percent after surging more than 20 percent just last week.

DPST aims to deliver triple the daily returns of the S&P Regional Banks Select Industry Index.

What's Next

In a word: earnings. The veracity of DPST's recent rally and WDRW's ability to snap its cold streak will be tested in earnest this week when over 56 percent of the S&P Regional Banks Select Industry Index reports earnings.

Data indicate traders are leaning toward the bullish DPST. DPST has seen modest inflows since the start of 2019 while WDRW has seen no creation or redemption activity.

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