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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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