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. See more from BenzingaClick here for options trades from BenzingaNew Cybersecurity ETF Arrives And It's The Cheapest Of The BunchA Star Is Born: New ETF Taps Into China's Innovative Side© 2021 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
Learn about some of the leveraged exchange-traded funds (ETFs) that investors can use to track the banking industry within the financial sector.
Second-quarter earnings season starts next week with the quarterly kick-off ritual of reports from the major investment and money center banks.What HappenedWith the arrival of each bank earnings season comes opportunity with either the Direxion Daily Financial Bull 3X Shares (NYSE: FAS) and/or the Direxion Daily Financial Bear 3X Shares (NYSE: FAZ).The bullish FAS tries to deliver triple the daily returns of the Russell 1000® Financial Services Index while the bearish FAZ, which is higher by 9.16% over the past month, attempts to deliver triple the daily inverse performance of that benchmark.Why It's Important View more earnings on FASBanks faced an array of headwinds in the first half of 2020, including declining interest rates, rising loan loss reserves and the mandate from the Federal Reserve that buybacks be scuttled and dividend hikes be put on hold."Goldman analyst Richard Ramsden is more bearish, projecting earnings off 69% compared with last year. On the plus side, with the exception of Wells Fargo (NYSE: WFC), which he believes will report a quarterly loss, banks are apt to avoid dividend cuts," reports Barron's. "Still, banks will be hurt by higher reserves, which he expects to hit $32 billion, 27% over last quarter."Reading through the tea leaves of that assessment, it would appear that the bearish FAZ has a chance to shine this earnings season. Potentially bolstering the case for FAZ is that bank stocks, though still inexpensive relative to the broader market, aren't quite the value plays they were 12 months ago. "Even with the recent increase in stock prices, the median North American financial sector stock still trades at an 11% discount to its fair value estimate but below a 30% discount a quarter ago," according to Morningstar. "With our assessment that many financial sector stocks are less undervalued than they were a quarter ago, investors should be much more discerning of which stocks they choose and cognizant of the risks they're taking."What's Next Something else to consider when it comes to the FAS/FAZ decision is that the Russell 1000 Financial Services Index isn't a bank-specific benchmark. It includes insurance providers and asset managers, among others and some of those companies aren't all that inexpensive, either."Outside of banks, we see fewer bargains in the financial sector. The investment-management firms we considered undervalued at the end of the first quarter are mostly fairly valued after the run in the stock market," notes Morningstar. "The median North American insurer we cover also trades at around an only 8% discount to its fair value estimate, which is a relatively small margin of safety, given the insurance industry's exposure to interest rates, asset prices, and tail risk of large insurance claims from the pandemic."See more from Benzinga * Good News For This Leveraged ETF: Bank Dividends Are Still At Risk * Murky Dividend Picture Puts Bearish Bank ETF In The Spotlight(C) 2020 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.