Already a disappointing sector through 2017’s early stages, the financial services sector, the second-largest sector weight in the S&P 500, faces plenty of skepticism ahead of its earnings season, which commences in earnest later this week.
The financial sector is getting hit by a double whammy as more are growing concerned over Trump’s ability to deliver on promises and yields on Treasury bonds pulled back.
U.S. equities have been rallying since the election on hopes and optimism that the new Trump administration would enact pro-growth policies to fuel the high-flying market valuations. However, some traders and investors are expressing concerns that the Trump trade is overbought, which makes the equities market vulnerable to quick turns.
The Financial Select Sector SPDR (NYSEArca: XLF), the largest financial services ETF, is up just over 1% year-to-date, but the SPDR S&P Bank ETF (NYSEArca: KBE) and the SPDR S&P Regional Banking ETF (NYSEArca: KRE) are down an average of 3%.
“A big week is ahead for the financials sector as a handful of big banks get ready to report earnings, but Todd Gordon of TradingAnalysis.com sees downside brewing in the charts for the group,” reports CNBC. “Financials initially began the year as one of the best-performing sectors, but the sector has since slumped almost 7 percent. Citigroup, Wells Fargo and JPMorgan are all slated to report earnings on Thursday, and from a technical standpoint, Gordon believes investors should still bet against the banks.”
Aggressive traders can use the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ), ProShares UltraPro Short Financials (NYSEArca: FINZ) and Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) to capitalize on any further downside from bank stocks and the broader financial sector.
Some analysts and traders argue that investors should be careful in making bullish bets on the financial services space, the S&P 500’s second-largest sector allocation, leading up to earnings season. In fact, analysts currently are not all that enthusiastic regarding bank stocks.
Some strategists also argue that the financial sector may be a good area to look at this time around, given the potential for growth in a rising rate environment, along with potential tax and regulatory changes under the Donald Trump administration.
“Citigroup is expected to move 3 percent in either direction on Thursday’s earnings report while JPMorgan and Wells Fargo have implied moves of over 2 percent on earnings,” according to CNBC.
For more information on the financial sector, visit our financial category.