Dominique de Kevelioc de Bailleul: Euro Pacific Capital CEO Peter Schiff received top headline on Yahoo Finance News Tuesday, encouraging investors to loading up on gold and silver before the rush from global investors into precious metals becomes Read more…
Big Banks Earnings: Don’t Be Misled By The Sagging Banking Sector (XLF, FAS, FAZ, SKF, UYG, C, BAC, GS)
David Zeiler: As the grim bank earnings roll in over the next couple of weeks, beginning with JPMorgan Chase & Co. (NYSE:JPM) tomorrow (Friday) morning, don’t fall into the trap of thinking the financial sector’s woes in the last quarter reflect a sinking U.S. economy. Read more…
Ian Wyatt: At first glance, the third quarter was a booming success for U.S. banks (NYSEARCA:XLF). The $35 billion in profits U.S. banks was the highest total since before the recession, and was nearly 50% higher than the same quarter a year ago. But those profits were pretty hollow. Read more…
One trade I have been extremely bullish on is a long position on the KBW Bank Index (KBE) while shorting the KBW Regional Bank Index (KRE). This trade has worked out very well ever since I wrote on RealMoney’s Columnist Conversation with the trade. The play is betting on the relative out-performance of the large cap banks compared to smaller regional banks. The trade is unique in the sense that you are hedging your downside risk by shorting the Regional Bank Index, but profit when the spread widens.
In more detail, the KBE is an ETF of the 20 largest banking institutions in the U.S. Players like Bank of America (BAC), Wells Fargo (WFC), J.P. Morgan, US Bancorp, and Bank of New York Mellon (BK) make up the top five holdings of the security. The KRE ETF replicates the KBW Regional Banking Index, which is an equal weighted index of over 50 geographically diverse regional banking institutions. Top players in the KRE include First Niagra Financial Group (FNFG), WestAmerica Bancorp (WABC), TCF Financial (TCB), Hudson City Bancorp (HCBK), and City National (CYN).
Many options traders on Wednesday appeared to be taking a protective stance and employed bearish strategies in several exchange-traded funds on concerns the stock market’s recent gains are overdone.
The bearish activity comes on a day of choppy trade in the stock market. The Dow Jones industrial average .DJI and the Standard & Poor’s 500 index .SPX finished the session lower after disappointing results at Morgan Stanley reignited worries about the banking sector.
The market has been sensitive to the outlook for banks before the release of the federal government’s “stress test,” expected as early as Friday.
Option trading was heavy in the Direxion 3X Financial Bear Fund FAZ.P, or FAZ, a leveraged exchange-traded fund designed to move inversely to the financial sector. Its shares hit a low of $8.58, but bounced back as financials lagged late in the session. It closed at $9.90, up 7.73 percent.
The ETF’s option volume rose to double the normal levels, with 92,000 calls and 17,000 puts traded, according to option analytics firm Trade Alert.