The Regional Banks Are Speaking to the Markets, Are You Listening?

The Fed has been talking about it for more than a year.

Wall Street's analysts have caught on in the last few months, finally.

Even the Fed's staunchest critics are starting to agree.

I'm talking about interest rates.  More specifically, the likelihood that rates are going to stay high for a longer period.  Like into the second half of 2024.

In the last week, we've heard from multiple analysts that high-interest rates aren't going away for a while now. 

And there's one sector of the market that's getting squeezed hard as a result.  We'll get to that in a minute, first the Fed.

Next week, the Fed (Federal Open Market Committee) will meet to decide whether to raise interest rates or not.  Note that there is no option to lower them, just raise or no raise.

A look at the current Fed Funds Futures indicates that the market is expecting the Fed to hold rates steady next week.

The problem really isn't rates going higher at this point, it's how long they are going to stay there.  

According to the same Fed Funds Futures tool, the market is now forecasting that rates won't drop until June of 2024.  A scant month ago the same "market" thought that we would see rates start to lower in March.

 Hell, I can remember three or four months ago when the market expected to see rates start to fall before the end of 2023.

No way!


Because we're getting what everyone wanted, a soft landing.

Months ago, I pointed out right here that the market really didn't want lower rates by the end of the year.  

The reason is simple.  If the Fed were to lower rates by December it would mean that the economy was going to hell in a bucket.  You don't get lower rates for free, there must be some pain involved at this point.

But the current path to a potential soft landing means that the Fed can relax and let these higher rates sink in.

This is a problem for a few sectors.  I know... the first one you're thinking of right now is the housing sector, and you're not wrong.

Inventory is now starting to catch up with demand which means that higher rates will slow the housing market.  That's a problem in the future.

But right now, as we're gearing up for the next earning season - it's only a month away now - the financials are the sector that is speaking to you.  More specifically, the regional banks.

The regional banks are the same group of stocks that set fire to the market in February.  The reason?  The effect of higher rates on their balance sheets.

It was an outlier event to see multiple banks shutter, but to this day the core problem hasn't gone away.

Higher interest rates.

Higher interest rates are putting more pressure on the regional banks from both sides of the balance sheet.

Higher rates have done what they intended, slow loan activity.  

Small business loans, mortgage loans, personal loans, you name it.  That means less revenue for the banks.

Higher rates are costing the bank money to retain deposits.

I just looked online, I can get 5.4% for a one-year CD with minimal effort and restrictions.

That's the highest rate since 2009.

Sure, the banks are still making the "spread", or the difference between the rates they charge and those they bring in, but the volume of the rates they are paying is much higher than what they are collecting.

Bottom line, the banks have a margin problem that is going to last through 2024, and likely into 2025.

That would be fine if the market were expecting these stocks to do nothing for the next 18 months.

However, the market has much higher expectations for the regional banks.

Since bottoming in May, the regional banks ETF (KRE) has rallied more than 20%.  At its highs in July, the KRE was trading 40% higher.

The Nasdaq 100 has been underperforming the regional banks over the same time period.  That's right, the AI-driven rally in technology has failed to keep up with the normally slow-moving banks.

For one reason, expectations.

Traders bought the ultimate dip in the wake of the regional bank failures, meaning that it's time to put up or shut down for the regionals.

This afternoon (Tuesday, September 12, 2023) we'll see several of the larger regionals whisper their pre-earnings updates and announcements into Wall Street's ears at the Barclays 21st Global Financial Services Conference 2023.

This is the last push for the headliners to control the narrative for the next two to three months.

An example.  Last night, ahead of the conference, Fifth-Third Bancorp (FITB) announced a 6% increase to their dividend.

The stock trades 3% higher today while the KRE shares are up 1.25%.

This puts the KRE in a technical must-win situation that will drive the next two weeks of price action.

With today's positive price action, the KRE sits just above a key support and below two technical tests.


The KRE shares have been hovering above the $43 level for the last month.  After the initial test of this level - which served as resistance in June and the failing point for the ETF in April -  the KRE has been unable to bootstrap a meaningful rally.

Also providing support - though not trading below the KRE - is the bullishly trending 50-day moving average (green line in the chart above).  Historically, a 50-day trending higher suggests that a stock or ETF is likely to continue its trend.


That same 50-day moving average acted as resistance just one week ago, stifling the KRE's attempt to break from the gravitational pull of the already mentioned $43 price.

At the same time of that rejection, the KRE's 20-day moving average (red trendline) crossed below the 50-day, signaling a weakening of the regional bank sector's technical outlook.

The last two similar crosses of the 20- and 50-day moving averages have resulted in short-term 8% drops in the KRE.

To say that the KRE is in a technical "pickle" is an understatement.

Bottom Line

There are plenty of potential torpedoes in the water that can affect the regional banks.

Say something like this...

That's a headline from just over a week ago.  My read, there are plenty of embers still glowing in the regional bank sector.  All it takes is for one to catch a flame and the KRE will break through key support.

I'm trading this with a simple approach.  Puts on the KRE through one of the weakest seasonal periods makes sense.

There are several individual companies that are presenting the same "must-win" scenarios if you'd like to get more tactical in this critical sector.

I'll dive into two of these stocks with you tomorrow.

Until then, I wish you the best trading success.


The post The Regional Banks Are Speaking to the Markets, Are You Listening? appeared first on Penny Hawk.

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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