Concerns over slowing corporate earnings were one of several reasons mentioned for December's heightened volatility and steep market sell-off. Those concerns get thrust into the spotlight this week as banks report their fourth quarter earnings in earnest.
Citigroup Inc. (C) kicks off proceedings Monday, followed by JPMorgan Chase & Co. (JPM) and Wells Fargo & Company (WFC) on Tuesday. Investment banks dominate the earnings landscape Wednesday, with results from The Goldman Sachs Group, Inc. (GS), Bank of America Corporation (BAC) and Morgan Stanley (MS). Add a sprinkling of regional bank reporting as a support act, and investors suddenly have a better read as to how the earnings story may play out in 2019.
Analysts expect bank earnings to get a lift from increased commercial and industrial loan growth as well as from an uptick in trading activity from a quarter dominated by wild market swings and unusually high December trading volume.
"So much occurred in December and it was high volume at a time when we normally don't have that," said Jay Pestrichelli, co-founder of investment firm ZEGA Financial, per MarketWatch. On the flip side, Pestrichelli mentioned that a slower quarter in merger and acquisition activity could result in lower investment-bank fees.
From a technical standpoint, inverse financial exchange-traded funds (ETFs) sit near major support levels ahead of the week-long bank reporting extravaganza. Traders who want short exposure to the sector should ponder these three potential trading opportunities.
Direxion Daily Financial Bear 3X ETF (FAZ)
Created in 2008, the Direxion Daily Financial Bear 3X ETF (FAZ) aims to provide three times the inverse daily performance of the Russell 1000 Financial Services Index. It does this by investing in futures contracts, swaps and/or short positions. The fund's average spread of just 0.09% and deep liquidity make it a suitable instrument for short-term traders who want to take an aggressive bet against the financial sector. As of Jan. 14, 2019, FAZ has assets under management (AUM) of $161.17 million, offers a 0.56% dividend yield and is down nearly 10% year to date (YTD). The ETF's management fee of 0.95% is in line with the 0.94% category average.
FAZ shares traded sideways for most of 2018 before jumping 33% in December as financial stocks fell sharply along with the rest of the market. Although the fund has retraced in the first few weeks of 2019, price now finds vital support at the $12 level from a horizontal line that connects the February and October swing highs, as well as the 50-day simple moving average (SMA). Traders who take a long position should look to book profits on a move back to the December high near $16.50. Consider placing a stop-loss order just below the 200-day SMA to protect trading capital.
ProShares UltraShort Financials ETF (SKF)
The ProShares UltraShort Financials ETF (SKF), with net assets of $30.76 million, seeks to return two times the inverse daily performance of the Dow Jones U.S. Financials SM Index. The fund, launched in 2007, allows traders to take a position against heavyweight U.S. banking, insurance, real estate and investment companies, such as Berkshire Hathaway Inc. (BRK.B), JPMorgan Chase and Bank of America. SKF has an expense ratio of 0.95%, yields 0.06% and is down 6.83% as of Jan. 14, 2019.
The SKF chart generated a bullish "golden cross" signal when the 50-day SMA crossed above the 200-day SMA in mid-November. Since that time, the bulls have indeed controlled the fund, notably in December, when the shares jumped nearly 23%. Like FAZ, the price has retraced early in the new year and currently sits at major support from a horizontal line and the 50-day SMA. Consequently, those who want to buy the ETF should seek an entry point close to $22. Think about banking profits near the fund's 2018 high at $27.97 and closing losing trades if the price falls below $20.
Direxion Daily Regional Banks Bear 3X ETF (WDRW)
Formed in 2015, the Direxion Daily Regional Banks Bear 3X ETF (WDRW) attempts to provide three times the inverse daily return of the S&P Regional Banks Select Industry Index. Traders can use the ETF to gain leveraged short exposure to U.S. regional banking stocks. Mainstay constitutes in the benchmark index include KeyCorp (KEY), Sterling Bancorp (STL) and SunTrust Banks, Inc. (STI). The ETF's average spread of 0.89% and daily turnover of just 6,500 shares make it more suited to swing trading rather than day trading. WDRW, with AUM of $2.36 million, is down 18.51% for the year as of Jan. 14, 2019. A dividend yield of 0.30% partially offsets the fund's management fee of 0.99%.
The ETF's share price trended sharply higher between September and late December but has recently pulled back as financial stocks have bounced. Above average volume has accompanied the move higher, showing increasing interest from the bulls. Traders should look to buy at current levels, where the fund finds solid support from the October swing high, a four-month uptrend line and the 50-day SMA. Look to place a take-profit order near last month's high of $57.86. Stops could sit several points below the entry price to cut losing trades.