Withdraw Profits Using Oversold Financial Bear ETFs

Although financial stocks have recovered the lion's share of their steep December 2018 losses, the sector has still underperformed the broader market by roughly 4% year to date (YTD) in 2019.

With the Federal Reserve in "patient" mode and expecting that it won't hike interest rates again this year amid slower economic growth, banking stocks may feel pressure from squeezed net interest margins, as they will have little room to increase the difference between what they receive from borrowers and pay depositors. Moreover, when the yield curve inverts as it did in March – the yield on the 10-year Treasury bond fell slightly below that of the three-month bill – not only does it forecast an impending recession, but it further raises questions over banking margins, as banks borrow money at short-term rates and lend at long-term rates.

With earnings from some of the sector's biggest names such as JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Bank of America Corporation (BAC) dominating the earnings landscape over the next two weeks, traders should monitor these three financial inverse exchange-traded funds that sit at crucial technical support. Let's look over several trading ideas.

Direxion Daily Regional Banks Bear 3X Shares ETF (WDRW)

Created in 2015, the Direxion Daily Regional Banks Bear 3X Shares ETF (WDRW) aims to provide three times the inverse daily exposure to the S&P Regional Banks Select Industry Index. Top holdings in the tracked benchmark include Bank OZK (OZK), PacWest Bancorp (PACW) and Fifth Third Bancorp (FITB). The fund's average spread of 0.78% may be too wide for scalpers but shouldn't overly affect swing traders who can let profits run to cover trading costs. Trading at $28.77 with assets under management (AUM) of $3.35 million and issuing a 0.94% dividend yield, WDRW is down almost 40% YTD as of April 8, 2019. The fund's expense ratio of 1.07% sits slightly above the 0.94% category average.

WDRW shares rallied sharply for the first three weeks of March but have since retraced toward support at the 200-day simple moving average (SMA) and a trendline extending back to late February. The stochastic oscillator confirms oversold conditions that make this a high-probability area to open a long position. Consider setting a take-profit order near $38.50 – where the price may find resistance from the October and March swing highs. Place a stop just below the trendline to protect trading capital.

Chart depicting the share price of the Direxion Daily Regional Banks Bear 3X Shares ETF (WDRW)

Direxion Daily Financial Bear 3X Shares ETF (FAZ)

With a sizable asset pool of $176.79 million, the Direxion Daily Financial Bear 3X Shares ETF (FAZ) attempts to provide three times the inverse daily investment result of the Russell 1000 Financial Services Index. The underlying index's exposure to bellwether names like insurance giant Berkshire Hathaway Inc. (BRK.A), investment bank JPMorgan Chase and credit card company Visa Inc. (V) make the fund a cost-effective way for traders to short the broad financial sector. Returns for holding periods longer than one day may deviate from the advertised leverage, as the fund rebalances daily. As of April 8, 2019, FAZ yields 0.94% and has returned -34.73% for the year.

The bears have dominated price action in FAZ since late December, as buying interest returned to financial stocks and the broader market in the first quarter. The fund's price now sits just a nickel away from its 52-week low at $8.73 set on Sept. 21, 2018. That bottom combined with an extreme oversold stochastics reading provides support from which a bounce could occur. Those who take the trade should look for a test of the $10 horizontal line resistance level. Traders may want to wait for a signs of a reversal, such as a bullish engulfing pattern or a hammer candlestick, before committing capital. Cut losses if the price closes below the 52-week low.

Chart depicting the share price of the Direxion Daily Financial Bear 3X Shares ETF (FAZ)

ProShares Short Financials ETF (SEF)

Launched at the height of the financial crisis in June 2008, the ProShares Short Financials ETF (SEF) seeks to provide inverse exposure to the daily performance of the Dow Jones U.S. Financials SM Index. Top benchmark index weightings include banks at 29.49%, diversified financials at 27.71%, real estate at 19.88% and insurance at 13.89%. The fund's ultra-thin 0.06% spread and daily trading dollar volume of over $400,000 make it an ideal product for traders seeking a short-term play or hedge against financial stocks. SEF charges a competitive 0.95% management fee, pays a dividend yield of 0.70% and has fallen 12.47% YTD as of April 8, 2019.

Like the other financial inverse ETFs discussed, SEF's share price has tracked steadily lower since the end of last year. Over the previous two weeks, the fund has pulled back to an area that finds support from a trendline that connects the June and March swing lows, which also corresponds with a stochastic reading deep in oversold territory. Traders who buy current weakness could book profits at $23.20 resistance or when the stochastic indicator crosses back above the overbought threshold at 80. Manage risk by positioning a stop-loss order about 25 cents below the entry price.

Chart depicting the share price of the ProShares Short Financials ETF (SEF)
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