Let's use our imagination for a second.
You're in the boxing ring against Muhammad Ali (yikes), and he lands a powerful right hook that sends you tumbling to the mat.
In this hypothetical, you're not dead (somehow). Instead, you push yourself to your knees and eventually your feet as the ring official continues his booming count to 10.
"Four!...Five!...Six!...Seven!...Eight!"
You're on your feet, but your legs are shaky.
The official, seeing how visibly woozy you are, mercifully calls the fight. If you can believe it, Muhammad Ali won.
That's what we refer to as a "standing 8 count" - when a boxer is deemed unable to continue despite his best efforts to do so.
Well, this time, it's the regional banks in the ring against Ali.
And tomorrow is the day we find out whether the official lets the fight continue or not.
As you can see, after getting knocked to the mat back in March, the KRE has been standing on the mat woozily in hopes of getting its feet back underneath it.
The fact that we didn't see any sort of positive reaction from traders after the Silicon Valley Bank bailout is very telling to me.
I'm not sure what the news would have to be to get the traders to truly turn the corner on this sector - "Regional banks discover untapped megatons of platinum."
I'm not holding my breath for that one.
Instead, it's evidence to me that the entire trading world is just waiting for a soft breeze to blow through and convince them to cut bait with the whole thing.
And the thing is, there's a lot of wind in the forecast at the moment.
This chart shows the number of companies within the KRE that are set to report earnings throughout the next 10 days...
As you can see, things are about to get very interesting.
It would be easy to say, "Oh, tomorrow has the most reporting of any day, therefore it must be the most important."
That's a bit of an oversimplification. Between April 24 and April 27, an average of 16 banks report earnings each day. That's a lot of activity, and it would usually be more important than a single day of volume.
Except tomorrow isn't just any old type of volume...
I always tell you the importance of weighting when you monitor ETFs and draw conclusions. Well, it's not an overstatement to say that April 20 would be in the heavyweight class...
While the first chart showed a somewhat even distribution of banks reporting, this one tells an entirely different story.
A whopping 25% of the entire weight of the KRE reports its earnings tomorrow.
When you combine this fact with my previously stated one about earnings and their impact on the market, well, you can feel the gravity of the moment for regional banks.
The sheer fact that the KRE has been moving sideways since March despite headlines signaling positive support means it won't take much to send this ETF plummeting further.
If there's any hope for this sector to get off the mat soon, it's going to be on the back of the forthcoming earnings announcements.
There are a few things that I'm going to be watching like a hawk with those.
First, I want to make sure we're still seeing some loan activity out there. Are we seeing a drop off in the demand for consumer loans? That's No. 1 for me.
The activity for commercial and personal loans is far hotter and heavier at regional banks than it is at your large banking centers.
A slowdown in the consumer means a slowdown in the regional banks.
Second, I'm watching for the risks from the market that are still out there for these banks.
We're seeing some buying coming into that, which usually sets me a little bit cool. I don't like to see buyers get optimistic, especially ahead of something could be something of a bomb drop.
There have been some inklings of good vibes, but I'm not going to be doing anything until I get the full picture of that 25% weight.
Now, my plan for trading this might not be what you might expect.
I'm not going in here like Jon Wayne, guns blazing, telling you the KRE is about to fall all the way down to $35 in the next couple of days.
Instead, I view this as an opportunity to protect the portfolio.
We're going to be looking into June for this because the reverberations are going to last for a month or two.
I'm looking to trade an at-the-money put, and the $44 level looks like the ideal strike.
Now, there are already 17,000 open interest contracts on the call side at the $43 strike, so you're likely to see a brief pause as the stock tries to break that level. That's the reason we need to buy time on the position.
Meanwhile, there are currently 61,000 put contracts open for the $38 strike. With that much open interest, it's going to act like a magnet to pull the price lower.
And we'll be ready on the way down.
Talk to you tomorrow morning.
The post Tomorrow Could be Doomsday for Regional Banks 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.