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Fickle Financial Fluctuations Could Make FAS, FAZ Fantastic

January 29, 2021 9:21 am
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Fickle Financial Fluctuations Could Make FAS, FAZ Fantastic

Financial services stocks ended 2020 on a strong note, rallying against the backdrop of buoyant expectations for cyclical and value stocks – two boxes the sector checks.

What Happened

Some of that shine is being lost in the early stages of 2021, underscoring the delicate nature of the sector's recovery. Delicate or fickle, the Direxion Daily Financial Bull 3X Shares (NYSE:FAS) and the Direxion Daily Financial Bear 3X Shares (NYSE:FAZ).

The bullish FAS seeks returns corresponding with triple the daily performance of the Russell 1000 Financial Services Index while the bearish FAZ looks to deliver triple the daily inverse returns of that benchmark.

Why It's Important

Banks were the first deliverers of fourth-quarter earnings news, which triggered upside for FAZ and weakness in FAS.

“And yet, followers of the financials know what usually happens next: the banks show weakness.

So while each of the banks is still outperforming the S&P 500 for the year, they are all trading down since their reports. It’s a familiar refrain for followers of the financials, who have come to expect earnings to be a 'buy the rumor, sell the news' event,” according to Direxion.

FAS falling out of style and FAZ coming into bloom in recent weeks is disappointing for bank bulls. That much is obvious, but the scenario is compounded when considering some of the big banks are releasing loan loss reserves and repatriating that cash into earnings while others are restoring dividends and buybacks.

Recent gloominess (or shine for FAZ) could be a sign investors are back to pondering the impact of low interest rates on bank equities.

“That question of interest rates, as well as the larger question about the current national macroeconomic picture, will likely determine how long this bank rally may last,” said Direxion.

What's Next

For trades wanting to embrace FAS, there's plenty of reasons to believe there will be opportunities to do so over the course of 2021.

“Currently, the banks seem to be in relatively healthy financial condition, all things considered. Loan losses don’t appear to be as bad as expected, and several even mentioned resuming buybacks. So, despite Wall Street’s optimism (what some would call overly optimistic) over the past six months, its bullishness on the banking sector is seemingly on solid footing,” notes Direxion.

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