Financial stocks came under severe selling pressure last week as the nation's largest banks flagged that they have significantly bolstered their loan loss provisions in anticipation of a growing number of defaulting customers amid the ongoing coronavirus crisis.
According to The Financial Times, loan reserves at Bank of America Corporation (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), The Goldman Sachs Group, Inc. (GS), and Morgan Stanley (MS) soared to a combined total of $25.4 billion in the first quarter, up a collective 350% from a year earlier and to levels not seen since the Great Recession.
However, the group staged somewhat of a revival Friday as several states provided more information about the partial lifting of virus restrictions – giving investors hope that earlier-than-expected reopenings could mean fewer loan defaults than the banks' substantial loan provisions suggest.
As details about relaxing lockdown restrictions continue to emerge in the weeks and months ahead, traders can monitor the performance of the sector by following the three financial exchange-traded funds (ETFs) discussed below. Let's examine each fund in further detail and turn to the charts to identify possible trading opportunities.
Financial Select Sector SPDR Fund (XLF)
With an enormous asset base of almost $15 billion, the Financial Select Sector SPDR Fund (XLF) seeks to track the performance of the Financial Select Sector Index. Banking bellwethers JPMorgan, Bank of America, and Wells Fargo rank among the fund's top individual stock allocations with respective weightings of 11.45%, 7.25%, and 4.33%. Deep liquidity and an average penny spread make the fund suited to both swing traders and intraday scalpers. XLF charges a small 0.13% management fee, yields 2.88%, and has slumped 29.03% on the year as of April 20, 2020.
The ETF's share price has formed a rising wedge pattern since finding long-term support at $19. In Friday's session, the price jumped 5.27% from the pattern's lower trendline – a move that may lead to a "catch-up" rally in the weeks ahead. Those who execute a trade at these levels should think about booking profits on a test of crucial overhead resistance at $25.30 but cut losses on a breakdown below the falling wedge formation.
Direxion Daily Financial Bull 3X Shares (FAS)
The Direxion Daily Financial Bull 3X Shares (FAS) aims to return three times the daily performance of the Russell 1000 Financial Services Index. The ETF's net expense ratio of 0.99% isn't cheap, although holding costs are less of an issue here given the fund's short-term tactical mission. More importantly, daily turnover above 5 million shares provides ample trading volume. As of April 20, 2020, FAS has amassed $732.85 million in net assets and trades 72.75% lower this year. The fund yields 2.35%.
FAS shares continue to trade within a rising wedge pattern, with the relative strength index (RSI) indicating rising momentum. Active traders who expect further gains should look at placing a profit target between $50 and $60, where price encounters resistance from the 38.2% and 50% Fibonacci retracement levels as well as the June 2019 swing low. Protect capital with a stop-loss order placed underneath the April 16 low at $23.58.
Invesco KBW Bank ETF (KBWB)
Created in 2011, the Invesco KBW Bank ETF (KBWB) aims to deliver similar returns to the KBW Nasdaq Bank Index – a market cap-weighted index of U.S. banking firms. The fund's largest holding, JPMorgan, derived its increase of loan loss reserves on a base-case scenario that involves a 40% contraction in second quarter gross domestic product (GDP) and unemployment reaching 20%, according to FactSet, per MarketWatch. Meanwhile, more than 600,000 shares exchange hands per day on a narrow 0.06% spread to keep trading costs low. As of April 20, 2020, KBWB controls assets under management (AUM) of $325.59 million, offers a 4.46% dividend yield, and has fallen 40.38% year to date.
KBWB shares have oscillated within an ascending channel pattern over the past month, with the bulls pushing the price of the pattern's lower trendline in Friday trade. More buying this week could see a test of key horizontal line resistance at $46 between the 50- and 200-day simple moving averages (SMAs). The trade offers a favorable risk-to-reward ratio of more than 1:3 (risk per share of $3.08 vs. profit per share of $10.04), assuming a stop placed beneath last week's low at $32.88.