By the ETF research team at Direxion.

Banks: Wall Street putting its money where its money is

2021 has already been a fickle year for the big banks.

The group of JP Morgan, Citigroup, Bank of America, Goldman Sachs, Wells Fargo, and Morgan Stanley mostly reported Q4 earnings and revenue above consensus analyst estimates, keeping with the long-term trend.

This time around, only Bank of America, Wells Fargo, and Citigroup came in below revenue estimates—and only just so.

And yet, followers of the financials know what usually happens next: the banks show weakness.

So while each of the banks is still outperforming the S&P 500 for the year, they are all trading down since their reports. It’s a familiar refrain for followers of the financials, who have come to expect earnings to be a “buy the rumor, sell the news” event.

Unsurprisingly, this short-term rotation has benefitted financial bulls.

The Daily Financial Bear 3X Shares (FAZ US) is down almost 19% over the last 30 days. Likewise, the Daily Financial Bull 3X Shares (FAS US) is up about the same amount in this time period.

Source: Direxion.

Renewed interest in regionals

Moving down the market cap ladder, the action in the regional banks has dwarfed that of its national counterparts.

Just like the big banks, most regional banks have reported earnings beats for Q4, including First Republic Bank, PNC Financial, and Citizens Financial Group. But while the fundamental story between the two groups is similar, the trading action is not.

The Direxion Daily Regional Banks Bull 3X Shares (DPST US) is up 128% over the last three months, and year-to-date has taken in over $28 million in inflows.

Source: Direxion.

Regional banks’ performance can again be chalked up to increased account activity, with PNC reporting strong deposits and, like its larger counterparts, additional capital that was previously set aside for potential loan loss.

The enthusiasm represents a decisive change in fortune for the regional banks, which, even more so than the big banks, drastically lagged the market through the bulk of 2020. Of course, these smaller financials also carry the same risk of a default wave as the big banks. What’s more, revenue among these smaller institutions is also handicapped by the current low interest rate environment that diminishes their ability to generate revenue through lending or owning rate-sensitive assets.

Big picture

That question of interest rates, as well as the larger question about the current national macroeconomic picture, will likely determine how long this bank rally may last.

Currently, the banks seem to be in relatively healthy financial condition, all things considered. Loan losses don’t appear to be as bad as expected, and several even mentioned resuming buybacks.

So, despite Wall Street’s optimism (what some would call overly optimistic) over the past six months, its bullishness on the banking sector is seemingly on solid footing.

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(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)