What a year the banks have had. The bears have really gone into hibernation while the bulls have just pushed ahead and keep pushing the buy button. The pain for bears and many bearish funds led to Direxion, a leader in providing popular alternative investment solutions, including leveraged bear funds, to announce on March 1 that it was going to execute a reverse share split of its popular Daily Financial Bear 3x Shares ETF (NYSEARCA:FAZ). FAZ is a unique investment vehicle that seeks daily investment results, before fees and expenses, of 300 percent of the inverse of the performance of the Russell 1000 Financial Services Index.
Under normal circumstances, Daily Financial Bear 3x Shares ETF management creates short positions by investing at least 80 percent of its assets in financial instruments that, in combination, provide leveraged and unleveraged exposure to the index. This split continues a line of reverse splits in bearish and volatility funds in the past few months, as the five-year bull market continues to power higher with low volatility. But all of that seems like it’s coming to a halt, as the Dow is down 1,000 points in the last month. Technically, Daily Financial Bear 3x Shares ETF is setting up nicely for a trade. It can make you a lot of money in a short amount of time.
In late last year, shares of the Daily Financial Bear 3x Shares ETF entered into oversold territory and really haven’t gotten out of that rut until recently, when buyers stepped back in. We define oversold territory using the Relative Strength Index, or RSI, which is a technical analysis indicator used to measure momentum on a scale of zero to 100. A stock is considered to be oversold if the RSI reading falls below 30. In the case of Daily Financial Bear 3x Shares, the RSI reading hit 29.1 in November, while the RSI reading for the S&P 500 was 69.
Relative strength has come down for the S&P 500 but is rising for Daily Financial Bear 3x Shares ETF . An investor who thinks this selloff will continue could look at FAZ emerging from oversold territory as a sign that all the recent heavy selling is in the process of exhausting itself and begin to look for entry-point opportunities on the buy side. Fundamentally, the banks are getting hammered and FAZ is naturally responding well.
Recognize that this is not a buy and hold fund. These leveraged funds are rebalanced daily and as such, they are prone to “slippage.” This means that if the banks all held the same price, Daily Financial Bear 3x Shares ETF’s price would decline over time. In fact, the only way this trade works is when massive selloffs are occurring, much like we have now. Thus, as a short-term trade to take advantage of the volatility in the banks and the turmoil in the market, traders can consider a position in FAZ for outsized returns. Daily Financial Bear 3x Shares ETF’s low point in its 52-week range is $20.72 per share, with $50.72 as the 52-week high point. Shares are currently up 5.8 percent on the day at the time of writing at $24.96 and climbing.
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