Trading Regional Banks – Is The Crisis Really Over?

Heading into Wednesday’s trading session, regional banks continue to look incredibly vulnerable from the short side and any weakness should be aggressively pounced upon by traders. Since putting in multi-year lows on May 11, the SPDR S&P Regional Banking ETF KRE has rallied into the end of the month, moving from ~$36.00 to close just above $40.00 on Tuesday.

From a technical perspective, this little bounce is not particularly encouraging and traders should look to add short exposure in the ETF below the $40.00 level. 

The turmoil in the banking sector has been making headlines for a couple of months now, and many on the Street are taking the view that the crisis has largely played itself out. The charts, however, seem to be telling a very different story, and stress in the regional banks could very well be back on the front page soon. 

The KRE ETF is a very good vehicle to play the sector as a whole, but many will want to wade into individual names such as Western Alliance WAL, PacWest Bancorp (NASDAQ:  PACW), Zions Bancorporation ZION, and Huntington Bancshares (NASDAQ:  HBAN) to name a few. 

While the very near-term momentum has been higher in these names, the rally has been extremely weak given the outsized losses in regional banking stocks this year. A renewed bout of weakness would likely send all of these names below their most recent lows in a hurry. 

The catalyst that traders should be keying on is market sentiment regarding the June FOMC meeting. The consensus view has been that the Federal Reserve is done with its interest-rate hiking cycle and will keep rates unchanged at the June meeting. 

Recently, however, this view has come into question amid better-than-expected economic numbers and continued hawkish signaling from not only the Fed but also other global central banks. 

As a result, the probability of another 0.25% rate hike in June has risen above 65% according to the CME FedWatch Tool. 

These banks seem to be in very serious trouble as deposits continue to flow out of the United States banking system and losses add up on loans and bonds due to the historically rapid rise in rates. Another rate hike could potentially be catastrophic for the most vulnerable regional banking institutions. 

The next Fed meeting is in 14 days. Traders should continue to monitor interest rate expectations in the coming weeks and keep an eye on KRE. Any general market weakness and a continued move higher in terms of expectations of an additional hike in June will likely spark another round of fear and selling in this sector. 

Featured photo by Aditya Vyas on Unsplash.