As earnings season continues and financials unveil their numbers, a common theme is emerging: A tightening economy is pinching results.

That's because some of the most notorious earnings management techniques -- like release loan loss reserves or booking profits from a drop in a bank's own bond prices -- aren't working anymore. Moreover, there are signs that core investment banking operations are slowing while commercial banks are beginning to see an increase in delinquent loans again -- a dynamic that's strengthening in Europe, especially in Spain, as home prices fall.

Now stocks in the sector are threatening to drop down and out of a two-month-long pennant-reversal pattern.

This morning, Bank of America (BAC) reported a loss of 3 cents per share (vs. expectations of $0.11) as the company had to book, as a loss, an increase in the value of its debt. Excluding that, revenue was still down 3% as nonperforming loans increased from Q4. 

Morgan Stanley (MS) reported a loss of 5 cents on estimates of $0.43, thanks to an 8.4% drop in revenue. Investment banking and trading revenue both declined from year-ago levels. The company also had to take a loss on an increase in the value of its debt.

Earlier in the week, we had results from Goldman Sachs (GS), featuring a big drop in the company's risk exposure, a sign of caution and pessimism in the economy and markets. Morgan Stanley's risk exposure also dropped significantly.

Interest margins are falling across the industry as mortgages are refinanced at lower rates, Treasury yields drop again, and the competition for deposits heat up as the household savings rate falls.

The other big standout is how dramatically bank CEOs are pulling down loan-loss reserves to the bare minimum, especially smaller regional banks. This is typical late-business-cycle behavior. It makes banks vulnerable to any weakening in the economy and resulting increase in bad loans, since not only will revenue suffer but earnings will be hit by a need to rebuild loan loss provisions.

Here are three examples:

• New York Community Bancorp (NYB): Loan loss provisions down to $15 million from $26 million in Q4, a drop of 42%.
• Huntington Bancshares (HBAN): Provisions down to $34.4 million from $45.3 million, a drop of 24% that takes it down to "the low end of our long-term expectation" according to management.
• Umpqua Holdings (UMPQ): Provisions down to $3.2 million vs. $15 million a year ago. Given that bank stocks were one of the primary motivators of the recent market uptrend, the new emerging downtrend in the sector is weighing on everything else.

For nimble traders, there are plenty of profit opportunities on the short side. Leveraged inverse ETF candidates include the ProShares UltraShort Financials (SKF), which I've recommended to my newsletter subscribers, and the Direxion 3x Daily Financial Bear (FAZ).

Individual short ideas include Bank of America and First Horizon National Corp. (FHN). I'm adding short positions in both, as well as a position in FAZ, to my Edge Letter Sample Portfolio.

I found FAZ, BAC, and FHN with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)

Disclosure: Anthony has recommended SKF to his newsletter subscribers. 

Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at anthony@edgeletter.c​​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.