From Taki Tsaklanos: Regional banking stocks doubled in exactly 12 months. Smart investors know that such a steep rise cannot continue. Visibly, after prices doubled, a sharp correction started.
In yesterday’s post, we asked out loud whether there is a huge double top in the financials stock market sector. If that scenario would come true, then regional banking stocks would be in big trouble. But we aren’t there yet.
Let’s first revise the shorter term outlook.
From a price analysis perspective (chart reading), regional banking stocks are (over)due for a correction. Uncoincidentally, that correction started as the sector reached 60 points in the KRE ETF (regional banking stocks), after the sector doubled.
The most obvious retracement target is the breakout level at 45 points.
As always, former resistance becomes support. KRE, representing the regional banking stock market sector, is most likely going to follow the same path.
Investors should watch closely what happens at 45 points.
There are two scenarios going forward.
Either the breakout point becomes support, and regional banking stocks go higher from that level. In that scenario, we expect yields to rise again, and even breakout from the very long term downtrend. That could be hugely bullish for banks, and the financial sector could break out big time.
The other scenario is that broad markets will weaken, and yields will fall, in which case financials and regional banks in particular will suffer severely. The breakout point in KRE will give away in that case.
The SPDR KBW Regional Banking ETF (NYSE:KRE) was unchanged in premarket trading Friday. Year-to-date, KRE has declined -4.64%, versus a 4.70% rise in the benchmark S&P 500 index during the same period.
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