MOST READ: How to Play Crumbling Financials

Even though first quarter earnings this year were 46% lower than the same period in 2007, industry earnings are likely to suffer further since, by one measure, loan loss reserves remain at historically low levels. Reserves covered 89% of nonperforming loans as of March 31, which is the lowest level of reserve coverage since 1993, according to the FDIC. While 89% coverage is still a decent level, considering that most nonperforming loans are secured by real estate, there is continued pressure for elevated loan loss provisioning.

One Way to Play Banks Down Here

If you are adverse to shorting individual bank stocks, then Kevin Baker, TheStreet.com Ratings' mutual fund analyst, points out that you may want to consider investing in the exchange-traded funds that sell short large portions of the financial sector.

On June 12, ProShares launched the Short Financials ProShares(SEF Quote). This fund seeks returns opposite the daily performance of the Dow Jones U.S. Financial Index.

The new fund is a less aggressive version of the 200% negatively leveraged UltraShort Financial ProShares(SKF Quote) targeting the same index that has been trading since February 2007. In the last year, the UltraShort Financials ProShares have nearly doubled in value, up 92.57% including a 34.42% rise year-to-date. This fund topped the list of best performing financial funds earlier this month.

Here are the largest positions in the long version of the fund, as of June 20:

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To create the leverage, the fund portfolio includes nearly $1.17 billion notional value of swap contracts on the underlying Dow Jones U.S. Financial Index. The inverse fund's bets against the above stocks and against the index amount to a notional value of swap contracts reaching $4.56 billion.