• Bank stocks are among the worst performers on the stock market this year. They have been left behind even as investors price in a recovery for the economy. 
  • These companies are poised to rally from “extreme oversold” conditions and may also benefit from so-called short covering, according to Julian Emanuel, the chief equity and derivatives strategist at BTIG.
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Financial stocks have been woefully left behind in the market’s recent rebound.

Only the troubled energy sector of the S&P 500 is faring worse than this cohort, which is down 29% year-to-date. On the other end of the ranking, technology and healthcare stocks are rallying the most as investors grow more expectant that the economy will recover later this year. 

The underperformance of financials since the market bottomed on March 23 is puzzling to Julian Emanuel, the chief equity and derivatives strategist at BTIG.

He says financials — and especially banks — should be benefiting from the Federal Reserve’s efforts to shore up the economy. Emanuel notes that they are central to distributing aid to small businesses and enabling the issuance of debt that will avert the potential solvency crisis Wall Street was panicking about earlier this year. 

Additionally, Fed Chairman Jerome Powell has affirmed that negative interest rates — a phenomenon that would crush bank profits from loan making — will not be used to fight the crisis. 

This backdrop is what makes financials’ underperformance baffling to Emanuel, and he is now advising clients to position for a sector rebound. 

He recalls that many market reversals in the past have happened when stocks were at “extreme oversold” conditions. Also, such stocks that suddenly bounce are among the most disliked.

In a recent note, he identified 14 bank stocks that are in the top percentile of short interest for the past two years, meaning a large number of shares have been borrowed with the hope that they decrease in price. All of these companies are down by more than 35% from their 52-week highs. 

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