A Leveraged Idea For The December Fed Meeting

The S&P Regional Banks Select Industry Index, one of the most widely followed gauges of regional bank stocks, jumped 3 percent last week. That could be a sign some traders are betting asset that are positively correlated to higher interest rates are worth considering ahead of the Federal Reserve's December meeting.

Bond markets are pricing in an all-but-guaranteed rate hike by the Fed next month, which mark the central bank's third such move this year. As traders embrace the notion of a December rate increase, the Direxion Daily Regional Banks Bull 3X Shares DPST and the Direxion Daily Regional Banks Bear 3X Shares WDRW could become increasingly appealing for aggressive, risk-tolerant traders.

Obviously, WDRW would be a play to consider if the Fed reverses course and opts against a December rate hike. WDRW looks to deliver triple the daily inverse returns of the S&P Regional Banks Select Industry Index while the bullish DPST looks to deliver triple the daily returns of that benchmark.

Other Catalysts For Regional Banks

Higher interest are meaningful for regional bank stocks. Historical data confirm few industries or sectors are as positively correlated to higher borrowing costs as are regional banks because higher interest rates boost net interest margins. However, there are other catalysts for ETFs such as DPST, including an improving regulatory environment.

The Senate recently agreed to ease some of the oversight requirements on regional banks set forth by the Dodd-Frank law.

“The deal would exempt banks with as many as $250 billion in assets from the oversight of the Federal Reserve,” according to PYMNTS.com. “Currently, banks earning more than $50 billion face Federal Reserve oversight, the report noted. If the legislation is passed, the number of banks that must comply with the law would be reduced to approximately 12 compared to the roughly 40 as it stands today.” 

Some Bearish Inklings

Last week, WDRW posted five-day volume that was nearly 24 percent above its trailing 20-day average, according to issuer data. 

Over the past month, DPST has seen outflows while WDRW has been stable on that front. The index the ETF allocates about 45 percent of its weight to banks in the southern and western states.

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