Financial services stocks and exchange traded funds rose last week after the Federal Reserve said it will gradually begin unwinding its balance sheet and fixed income traders priced in increasing odds of a December interest rate hike.
Those headlines helped the SPDR S&P Bank ETF (NYSEArca: KBE), which focuses exclusively on bank stocks, notch a weekly gain of nearly 4%. That performance also helped KBE extended an important Fed week streak.
“And while its chart still looks promising — KBE is now on pace for a fourth straight close above its 80-day moving average — it looks like one options trader yesterday bet on a quick retreat from the fund,” reports Schaeffer’s Investment Research.
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.
The Trump administration’s expansionary policies would be especially beneficial for banks since the segment is sensitive to the overall economy. Moreover, the expansionary policies have fueled bets of increased Federal Reserve interest rate hikes to rein in a potentially overheating economy and rising inflation, which further supports lending revenue and their bottom line among bankers and insurers.
KBE is now flat on the year and remains 7.5% below its 52-week high, which was last seen in the first quarter.
Some market observers attribute sluggish performances in the financial services sector to stringent regulations and the prolonged low-rate environment following the financial depression, which has suppressed net interest margins. Consequently, investors should expect that a tighter monetary policy out of the Federal Reserve and potential rollbacks on depression-era regulations, notably Dodd-Frank, could fuel growth in the financial sector.
“Specifically, KBE put volume closed yesterday at three times the intraday norm, thanks to a big trade at the October 42 put. One trader seemingly bought to open 2,000 of the contracts for 46 cents each, meaning they spent $92,000 to bet on the ETF retreating back below $42 by the close on Friday, Oct. 20, when the series expires,” according to Schaeffer’s.
Financial sector valuations still look relatively cheap, compared to the broader market. The sector’s valuations are still about 25% below the average since the early 1990s.
For more information on the financial sector, visit our financial category.