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Forget earnings, the Fed holds the key for financials: Traders

It's Janet Yellen, not Q1 earnings, that could revive the slumping financials sector, according to two traders.

"If the Fed begins its tightening cycle for real, everyone is going to flock back into financials," Boris Schlossberg of BK Asset Management said on CNBC's "Trading Nation" on Friday. "And that's going to be a very good trade."

Despite the broader market's recent rally, the financials haven't followed suit. The banks are down more than 7 percent this year, making it the S&P 500's worst performing sector. Schlossberg says the Fed is to blame.

Fed chair "Janet Yellen threw a curveball at the market, and that's one of the reasons the financials got really badly hurt," said Schlossberg. "The market was really positioned for an interest rate cycle hike, and so far that hasn't happened."

Higher rates tend to be good for the financials, as it increases the returns they make on all the cash they hold.

"We do need the Fed to change its posture," said Schlossberg. "The moment it does, the financials are probably going to be one of the best trades out there."

Gina Sanchez of Chantico Global isn't holding her breath for a bank rally.

"The outlook for the medium term, until we start to see a Fed hike coming, is going to be pretty gloomy for the banks," Sanchez said on Friday's "Trading Nation."

She does see one glimmer of hope for the sector.

"We have seen operating margins going up in banks, where we have seen operating margins falling for the rest of the S&P 500," she said. "So that is actually one bright spot for financials — meaning that at some point, when they can start to really generate actual sales and earnings, that should be a good thing."

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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