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Trading On Disappointment In Regional Banks

December 13, 2018 4:29 pm
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File regional banks and the S&P Regional Banks Select Industry Index (SPSIRBKT) under the category of "epic disappointments" for investors this year. 

That index is down nearly 14 percent year-to-date, a loss that exceeds that of the broader Financial Select Sector Index by 200 basis points.

What Happened

Finding winners among regional bank investment is difficult, making the Direxion Daily Regional Banks Bear 3X Shares (NYSE:WDRW) a standout. WDRW looks to deliver triple the daily inverse performance of the S&P Regional Banks Select Industry Index.

Underscoring the case for inverse ETFs such as WDRW is Wall Street's growing dissatisfaction with bank stocks. For example, KBW recently lowered its rating on bank stocks to Marketweight from Overweight.

“It also lowered banks' earnings estimates for 2019 and 2020 and said it expected other analysts to do the same. KBW's move follows a similar one by independent research firm CFRA last week,” according to CNBC.

Why It's Important

Fears of slowing economic and deteriorating conditions in the housing market are pressuring regional bank stocks, increasing the allure of WDRW for short-term traders.

“Banks have been punished over investor fears that the U.S. economy is nearing the end of a long boom,” according to CNBC. “Worries began earlier this year as the yield curve — the difference between rates on short term and long term U.S. bonds — flattened, indicating bank profits could be crimped (banks borrow on the short end and lend at the long end).”

Even with Wednesday's loss of 4 percent, WDRW is still Direxion's best-performing inverse leveraged ETF in December, with a month-to-date gain of 30 percent.

What's Next

“Banks have come under pressure recently as investors worry that rising rates might slow lending and raise the amount the firms have to pay customers in interest,” reports Bloomberg.

Still, traders remain fond of WDRW's bullish counterpart, the Direxion Daily Regional Banks Bull 3X Shares (NYSE:DPST). Over the past 10 days, DPST's inflows represent almost 15 percent of its total assets under management, good for the third-best percentage among Direxion's leveraged bullish ETFs during that span.

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