Backing Out of Overbought Bank Stocks
The buying momentum in bank stocks took a pause heading into midweek. As began to take profits in regional banks like Fifth Third Bancorp (NASDAQ: FITB) as well as money center banks like Suntrust Banks Inc. (NYSE: STI), so did buyers continue to press the offensive in markets like Northern Trust (NASDAQ: NTRS) – a regional bank – and Banco Santander Chile (NYSE: SAN) – a global money center bank.
The Tuesday pause notwithstanding, many financial stocks remain at or near overbought levels, and continue to trade in bear market territory. Historically, this has proven to be a potent combination in the short term, and one typically leading to overbought markets moving lower until those overbought conditions are relieved.
Inverse leveraged ETFs like the Direxion Daily Financial Bear 3x Shares (NYSE: FAZ), which moves up as financial stocks move down, are among the easiest ways for traders to take advantage of this kind of potential short term move lower. Instead of borrowing shares of individual stocks or even borrowing an ETF, traders can buy the FAZ and, in the short term, realize gains in the fund as financial stocks decline.
Heading into trading on Wednesday, the Direxion Daily Financial Bear 3x Shares has a positive edge of well over 6%. And having closed lower for three out of the past five sessions, FAZ is again trading near the lows of late October. It was at these levels where FAZ pulled back for five out of six sessions, before rallying for three days in a row, gaining more than 24%.
Other inverse leveraged options include the ProShares UltraShort Financials ETF (NYSE: SKF), which is leveraged two-to-one, rather than three-to-one like the Direxion fund. SKF also has a positive short term edge ahead of Wednesday’s trading.
Remember that sound money management means reducing your position size proportionately when trading leveraged exchange-traded funds. In other words, if you are trading a 3x ETF, reduce your standard position size by 1/3. When trading a 2x ETF, cut your standard position in half.
The ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.
David Penn is Editor in Chief of TradingMarkets.com