Banking On Bank Earnings With Leveraged ETFs

After spending much of the year lagging the broader market, the financial services sector has recently been gaining steam. Over the past month, the largest exchange traded fund (ETF) tracking the sector is higher by about 6.3 percent.

Those gains could be tested this week amid testimony from Federal Reserve Chair Janet Yellen and an avalanche of earnings reports from the biggest U.S. banks. In other words, this week could be the ideal time to consider the Direxion Daily Financial Bull 3X Shares FAS and the Direxion Daily Financial Bear 3X Shares FAZ. FAS attempts to deliver triple the daily returns of the Russell 1000 Financial Service Index while FAZ looks to deliver triple the daily inverse returns of that index.

As TD Ameritrade's JJ Kinahan noted last week, “The financial sector is forecasted to report year-over-year earnings growth of 6.8 percent, the third highest out of the 11 sectors in the S&P 500, according to FactSet. At the industry level this quarter, only the insurance industry is expected to report double-digit earnings growth (20 percent); if the insurance industry is excluded from the financial sector’s estimated earnings growth rate, it would drop to 3.8 percent from 6.8 percent, also according to FactSet.”

What's On Deck

Among the marquee bank stocks reporting second-quarter results this week are Citigroup Inc. C, JPMorgan Chase & Co. JPM and Wells Fargo Co. WFC. Those are three of the top 10 holdings in the index FAS and FAZ track as those stocks combine for about 16 percent of the index's weight.

Bank of America Corp. BAC and Goldman Sachs Group Inc. GS, a combined 7 percent of the Russell 1000 Financial Services Index, step into the earnings confessional next, indicating that FAS and FAZ should be on the radars of active traders for a couple of weeks.

In advance of second-quarter earnings, some data points suggest traders are already rotating to FAS and FAZ. For example for the five-day period ended July 6^th, volume in FAS was 16 percent above the trailing 20-day average, according to Direxion data. Volume in the bearish FAZ also saw a modest increase over that period. 

Other Ideas

The combination of earnings and Fed commentary could also spark interest in rate-sensitive regional banks. Those scenarios could be short-term catalysts for the Direxion Daily Regional Banks Bull 3X Shares DPST and the Direxion Daily Regional Banks Bear 3X Shares WDRW.

DPST aims to deliver triple the daily returns of the S&P Regional Banks Select Industry Index while WDRW looks to deliver triple the daily inverse returns of that widely followed regional bank benchmark.

Related Links:

Best Sector ETFs For July.

A Neutral View On A Big Bank ETF.

Image credit: Ken Teegartin, Flickr