Market Overview

Left For Dead Bank Stocks Perk Up, Lifting Volatile ETF Along The Way

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Left For Dead Bank Stocks Perk Up, Lifting Volatile ETF Along The Way

Entering June, the only sector performing worse than financial services was energy, though both have plenty of excuses for 2020 struggles.

What Happened

The combination of low interest rates – a boon for some sectors – rising loan loss reserves at the hands of the sagging economy and speculation that banks will be forced to cut dividends weighed on the group earlier this year.

Fast-forward to late May/early June and things are looking up again for financials. Up 23.19% over the past week, the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) embodies traders' renewed affinity for bank stocks.

FAS, which looks to deliver triple the daily returns of the Russell 1000 Financial Services Index, is higher by 47.30% over the past month.

Why It's Important

Gains like that in short time frames could imply upside from here is limited, but some analysts still see banking equities as undervalued.

“They’re still priced like the global financial crisis, and that’s a complete disconnect to the stock market as a whole, and frankly it’s a disconnect to what the bond market says about banks,” said Wells Fargo bank analyst Mike Mayo in a recent CNBC interview.

Adding to the case for FAS is bank stocks appear to be getting the reopening treatment. Probably not on par with airlines or energy stocks, but the reopening theme is beneficial to cyclical sectors of which financial services is one. Should the economy continue clawing back jobs lost during the coronavirus pandemic, consumers can get back to paying their bills on time and banks could loosen lending reins.

“In a note released Monday, Mayo wrote that investor feedback to Wells Fargo since last week’s call to raise price targets indicated a willingness by clients to take larger positions in bank stocks,” according to CNBC.

What's Next

Keeping in mind that FAS nearly tripled off its March lows, that low interest continue crimping net interest margins and that the Federal Reserve could force banks to keep more capital on hand, potentially imperiling dividends in the process, the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ) could command some attention.

FAZ attempts to deliver triple the daily returns of the aforementioned Russell 1000 Financial Services Index and is lower by almost 21% over the past week.

 

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