+ 4.58
+ 1.51%
+ 5.52
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Big Banks Finally Beckon, Providing Juice To This Exciting ETF

December 8, 2020 6:45 am
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Big Banks Finally Beckon, Providing Juice To This Exciting ETF

Thanks in large part to the Federal Reserve taking interest rates to historic lows, it's been awhile since investors had anything to cheer about with bank stocks and the corresponding exchange traded funds.

What Happened: That's starting to change. For example, the Financial Select Sector SPDR (NYSE:XLF), the financial services ETF, is higher by 18% over the past month, indicating there's some momentum for once moribund bank stocks.

XLF's recent success is just one example, but there's a growing chorus of market participants forecasting ongoing ebullience for bank stocks in 2021 and those expectations are boosting the Direxion Daily Financial Bull 3X Shares (NYSE:FAS) right now.

FAS, which attempts to deliver triple the daily returns of the Russell 1000 Financial Services Index, is higher by more than 56% over the past month.

Why It's Important: Obviously, FAS is a leveraged ETF, meaning it's best deployed as a short-term trading instruments, but traders don't need to fret because there are some promising historical trends at play this month for FAS.

On a historical basis, 10 of the top 25 S&P 500 stocks in the final month of the year are banking names, including some marquee components in FAS's underlying index, such as JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS) and PNC Financial (NYSE:PNC).

Of that group of 10 bank stocks, all have December success rates of 80% to 90% and the worst performer is Comerica (NYSE:CMA) with an average last month return of 1.59%.

What's Next: Aside from historical patterns, which aren't guaranteed to repeat, FAS has other tailwinds. Namely an improving economy, which would enable FAS member firms to repatriate billions of dollars cash previously set aside for bad loans back into per share earnings.

“The four biggest U.S. banks – JPMorgan Chase, Bank of America, Citigroup and Wells Fargo – have amassed a nearly $100 billion pile of cash for loan loss reserves as of the third quarter. The broader industry has created its largest collective reserve since 2010, when mortgage defaults sparked a recession that required massive bailouts of banks and other companies,” reports Hugh Son for CNBC.

Bottom line: If the economy improves, banks will have a windfall of cash that can be turned into earnings, potentially propelling FAS higher.

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