As Fed Potentially Preps Lower Rates Amid Economic Challenges, Direxion Bull & Bear 3X Shares Offer Amplified Trading Opportunities

JPMorgan Chase & Co JPM and Goldman Sachs Group GS ranked among the top institutions in the Financial Select Sector Index that have enjoyed a robust recovery following a sharp correction in late July. The Bank of Japan's (BOJ) decision to raise its benchmark interest rate sparked a significant market selloff, in large part due to the unwinding of the popular yen carry trade.

However, the BOJ's subsequent pledge not to raise rates during periods of market instability seems to have helped soothe nerves. In addition, blowout U.S. retail sales relative to economists' expectations suggested that the underlying consumer base was more resilient than previously anticipated. That helped instill confidence in payment card service providers Visa V and Mastercard MA.

Fundamentally, all eyes are focused on the Federal Reserve. As several experts have argued, the central bank has the evidence it needs to green light rate cuts. Key economic data – particularly the Producer Price Index and the Consumer Price Index – demonstrated that rising prices accelerated at a slower clip than previously forecasted. This disinflationary framework provides the breadth the Fed needs to justify a dovish monetary policy pivot.

However, it may not be all smooth sailing for the market. Earlier this year, Benzinga's Jeannine Mancini captured the dichotomy of the current paradigm. "Despite an ostensibly healthy economy, marked by strong consumer spending and the creation of 13 million jobs since President Joe Biden took office, public sentiment remains overwhelmingly negative," wrote Mancini.

Furthermore, the strongest name among the Financial Select Sector Index's top 10 holdings is insurance giant Progressive Corp PGR. That's not necessarily a great sign for broader market stability as it indicates a flight to safety.

The ETFs: With such ambiguities in place, the financial ecosystem seems ripe for speculative opportunities, which is where Direxion's leveraged exchange-traded funds come into focus. First, the Direxion Daily Financial Bull 3x Shares FAS provides 300% of the performance of the Financial Select Sector Index. Second, pessimistic traders can acquire units of the Direxion Daily Financial Bear 3x Shares FAZ, which provides 300% of the inverse performance of the aforementioned index.

Primarily, the benefit of the FAS and FAZ funds is the potential to extract quick profits without engaging the complex options market. With leveraged ETFs, investors acquire the underlying units just like any standard publicly traded security. However, it's important to note that leveraged funds should not be held for longer than one day. Otherwise, the daily compounding effect may lead to significant value erosion.

The FAS Chart: After falling precipitously lower in late July, the FAS ETF has quickly regained its technical standing. Since the start of the year, the leveraged bull fund has gained over 40%.

• On an encouraging note, the Daily Financial Bull 3X never touched its 200-day moving average during the fallout. Instead, on the bounce back, FAS shot quickly above its 50 DMA.
• Investors will want to be cautious about the fading volume level since the Aug. 5 session. Typically, rising volume should confirm a rising price.

The FAZ Chart: Enjoying a significant pop higher (as expected by many) during the late July/early August rout, the FAZ ETF has recently lost much momentum. Since the beginning of January, the leveraged inverse fund has fallen nearly 35%.

• During the aforementioned market correction, FAZ looked encouraging as it broke above a discernible horizontal support line marked by the $10.40 price tag. However, it's now struggling below $9.
• Moving forward, it's critical that the inverse fund regains control of the $9 level. From there, it must target the psychologically important $10 milestone if the bears want to avoid technical damage.

Featured image by S K from Pixabay.

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