Conflicting Theories Add Spice To Direxion's 3X Daily Financial Bull And Bear Funds

President Donald Trump is on a self-declared mission to restore the U.S. to its prior place of prominence – and he may accomplish exactly that. At the same time, it's fair to point out that his policies (particularly regarding international trade) have rattled world leaders and business executives alike. Thanks to directives like his Liberation Day tariffs, the new paradigm presents both significant risks and rewards.

On the optimistic side, the market – particularly the financial sector – has proven to be more resilient than some naysayers have expected. Perhaps most conspicuously, shares of JPMorgan Chase & Co. JPM have been on a rebound following their early April trough. Much of the enthusiasm came courtesy of the big bank's first-quarter earnings report, where it topped bottom-line estimates and delivered upbeat guidance.

Another potentially positive catalyst for the financial ecosystem is the Trump administration's deregulatory agenda. Earlier this year, Bank of America analyst Ebrahim H. Poonawala stated that multiple executives across several banks agreed that looser regulations will lead to financial teams freeing up the bandwidth to pursue growth opportunities rather than deal with compliance-related matters. Effectively, the White House may succeed in unlocking trapped efficiencies.

Moreover, President Trump, prior to his inauguration, proposed policies that could reboot the housing market. In particular, his plans to cut federal construction regulations, utilize federal land for housing and reduce energy costs might contribute to lowering the cost of housing. In turn, increased mortgage activity may help bolster the banking industry.

At the same time, not everything is so straightforward, especially with the Trump administration. For example, the president's focus on deporting immigrants in large numbers and reducing housing assistance could be inflationary. That may impede the real estate market, thus reducing demand for mortgages.

As for the health of the banks themselves, it's fair to point out that despite JPM stock's recent rally, it's still down for the year. The same goes for its peers in the so-called Big Four. In fact, at the time of writing, with a year-to-date loss of 3.23%, JPMorgan Chase is the best-performing bank of the majors. That's not exactly the biggest confidence booster.

Plus, it's the big banks – the institutions that have their fingers on the global economy's pulse – that have been sounding the alarm regarding recession risks. In other words, while there may be legitimate signs of optimism, the overall mood is quite somber.

The Direxion ETFs: Nevertheless, because of the conflicting views in the financial arena and the market as a whole, traders who wish to speculate can do so with Direxion's ultra-leveraged exchange-traded funds. For the optimists, the Direxion Daily Financial Bull 3x Shares FAS provides a medium for those with maximum upside conviction. On the other end, the pessimists can consider the Direxion Daily Financial Bear 3x Shares FAZ.

Both ETFs track the performance (or inverse performance) of the Financial Select Sector Index. Of course, given that these are 300%-leveraged instruments, traders must exercise extreme caution and discretion before participating. While the gains can come fast and furious, so can the losses.

Primarily, the purpose of the FAS and FAZ ETFs is to deliver a convenient mechanism for speculation. With 3X funds, traders can sidestep the options market for their leveraged or short wagers. ETF shares (or units) trade much like a standard publicly traded security.

Aside from the extreme market risk, though, prospective participants should note that leveraged and inverse ETFs – especially the 3X variety – should never be held for a period longer than one day. Structurally, the reason is volatility erosion, with returns likely to deviate from expectations due to the daily compounding effect.

The FAS ETF: While experiencing bouts of promise, the performance of the FAS ETF has been largely dour, with the ultra-leveraged fund losing more than 18% value since the January opener.

From a discrete-event analysis point of view, the FAS ETF has printed a "4-6" sequence in the past 10 weeks: four up weeks, six down weeks. Statistically, the 4-6 sequence yields a next-week upside probability of 54.32%.
On the weekly chart, FAS bounced off its 200-day moving average, lending support to the idea that the bulls may have a shot at moving the needle forward.

The FAZ ETF: Neither the FAS nor the FAZ is a decisive winner at this juncture. Still, the FAZ ETF is down less than 1% on a year-to-date basis, making it relatively victorious.

From the perspective of discrete-event analysis, the FAZ ETF has printed a "6-4" sequence in the past 10 weeks; six weeks up, four weeks down. Statistically, though, the 6-4 sequence yields a next-week downside probability of 57.58%.
On the weekly chart, the 50-day moving average has consistently imposed upside resistance against the ultra-bear fund. Therefore, speculators should exercise prudence.