Will Regional Banks Repeat Last Year's 30% Drop in March?

So, from the looks of the three market indicators we just talked about, this market may continue its rally.

There’s just one problem…

This morning’s news from New York Community Bancorp (NYCB) is going to cause some panic.

New York Bancorp shares are trading almost 25% lower this morning after the company disclosed that they’ve identified material weaknesses in their internal controls related to internal loan review.

The bank has been under pressure for months as investors grow more concerned over the bank’s real estate loan portfolio. We’re all heard that the “higher and longer” scenario from the Fed is going to put more pressure on banks with large real estate portfolios.

Just last month, the Mortgage Bankers Association said that there is $929 billion in U.S. commercial real estate debt maturing this year.

In theory, that means these loans must be paid off through a sale, refinanced, or extended to avoid default. That’s a lot of pressure on the real estate loan market, the majority of which is written by regional banks.

Bringing it back to NYCB…

This morning’s announcement is already sending a selling shockwave through the regional bank ETF (KRE). KRE shares are lower by more than one percent ahead of the opening bell. It’s the recent trend that has me more concerned than the negative 1% start to the day.

KRE shares have been doing a tap dance on the $47.50 price level for the last four weeks.

During that time, the ETFs 50-day moving average has shifted into an intermediate-term bearish trend, which means the technical trends will start putting pressure on the ETF to move lower.

Shares are 7.5% away from their 200-day moving average, which is the next level of support for the ETF.  A break below that trendline – currently sitting at $44.70 – will trigger more violent selling of the regional bank ETF to $40-$42, around 15% from current prices.

Bottom Line

Headlines will be the key here.  

Over the next few days, we’re going to see headlines from other regional banks as they try to control the narrative. This won’t be “damage control,” but more in the lines of messaging that “we’re ok.” I won’t be surprised to see Janet Yellen emerge from her office to do the same… control the narrative.

If we don’t see this, it may set the stage for another bumpy March for the regional banks.

For now, I am choosing to add a hedge position to the regional banks as this could be group zero for that healthy correction that the market needs so badly.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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