In the immediate wake of the Silicon Valley Bank disaster, we talked about the banking sector like a raging housefire across the street.
These spectacles are hard to ignore for the entire neighborhood - understandably so.
However, at the end of the day, the pros will get to the scene, battle the flames, and eventually extinguish the inferno.
But what if that flame doesn't get extinguished properly? What if there are embers smoldering under the ashy surface, waiting to flare up again?
This is the case in regional banks. The housefire was not properly extinguished, and following earnings announcements from First Republic Bank (FRC), it's back with a vengeance.
That's right - the embers that didn't get put out by Janet Yellen and the Fed just flared up again after FRC's earnings report Monday.
The morning started on a rough note with the following....
This was the match that lit the fuse for the stock getting halted the first time this week. It has since been halted again a seemingly countless number of times.
Following a declaration of "unprecedented" deposit outflows, public confidence in this stock was beyond shaken.
And from there, things got worse in the afternoon, as news broke that the bank was looking to sell assets to start raising capital against liabilities...
This was trying to directly address the issues on the balance sheet we caught wind of in their earnings announcement.
Well, from there, things went from worse to worser, as the following hit the tape at about 2 p.m. ET:
Of course, the purpose of special-purpose entities is to unload all of the bad stuff on a company's balance sheet onto another, newly created subsidiary.
So, if this were to play out, those banks that propped up FRC a month ago with $30 billion in deposits would be paying more money to acquire bad loans.
By golly, that almost sounds too good to be true for First Republic, now doesn't it?
I get flashbacks to Billy Madison - "I bet that Snack Pack's pretty good. Wanna trade me the rest of it for this banana?"
In a big shocker, it's still "not clear that the banks are willing to participate."
We actually have an exclusive look at all of the banks SRC reached out to ask about that possibility...
And, would you look at that, things got worse from there. Later that day, we moved our focus from assets to revenue.
The below headline struck another blow to FRC's prospects...
I shouldn't have to tell you that $13 billion of assets is substantial. Meanwhile, on top of that, FRC announced it would layoff 30% of its workforce, which will inevitably affect some of their in-house advisors as well.
The bottom line, not only is this an asset bleed, but it's a revenue bleed as well. Unsurprisingly, the net result of all of this is people putting an ever-increasing amount of distance between themselves and First Republic.
But, now that we know where THIS fire is, let's look at the whole neighborhood by way of tearing into the SPDR S&P Regional Banking ETF (KRE).
This is a confidence vote against the KRE.
What I mean by that is, not only do you now have these fears that the embers are glowing red across regional banks, but you also have to think about the potential of a recession and how much duress the regional banks experienced during each of the past two.
These fears are sitting squarely on the tee, waiting to get sent flying down the fairway.
It's confidence, it's also the fundamentals, and, of course, it's the technicals converging to tell me the KRE is ripe with opportunity.
So now is the best time to look at the KRE and some of the tickers that sit atop its weighted list...
We'll start with the top of the list and look at New York Community Bancorp Inc. (NYCB).
This is actually a company that we closed out a winner on in my Alpha Accelerators service a few weeks ago.
Of course, the reason we had it in that service is because it was trading below the $10 level. (If you're interested in learning more about Alpha Accelerators and how this method produces consistent winners, click here.)
We were seeing a lot of consolidation on NYCB right underneath its 200-day moving average (MA200), which in concert with the confidence crisis in regional banking, was capping the stock below $10.
Although, there is still some volume that's attempting to come in to balance it.
Ultimately, NYCB is one that I'd be tempted to take a look at.
Keep in mind, when you look at this 40% weighting of companies in the KRE, there aren't that many of the big-named ones that you'd recognize.
But Regions Financial Corporation (RF) is one that I think deserves a little closer analysis...
After its earnings report came down, we saw the stock touch down on that bottom Bollinger Band and the $18 level.
There's a lot of put open interest at that $18 level in the Mays and the Junes, which is now giving way. As we see that giving way, we get into a little situation where the options market begins to hedge some of that risk.
Because the people that sold those puts have to cover for the fact that they're on the hook for them.
So for that reason, I'm watching the $18 level with a target of $17. There's a volatility expansion moment around the corner on RF.
It all ties back into the concept of the standing eight count I brought up a week ago.
Do you see how RF has been range bound between 17 and 19 for two months now? The same thing is going on in the KRE.
All of these earnings announcements that are taking place in the regional banking world are effectively these companies trying to get back into the fight.
Unfortunately, as is the case in many standing eight counts, it is simply delaying the inevitable. The fundamentals tell me it is only a short matter of time before they find themselves knocked out on the mat.
So, with the KRE above, there are two things you need to make note of.
We've broken below that $42 level, which means that both fundamentally and technically, things are not good.
As you know, I look at trades from a fundamental, technical, and sentimental perspective.
The best buying circumstance is when you've got positive technicals and positive fundamentals, but an extremely fearful sentiment.
In this circumstance, we don't even really have one. Despite there being some fearful sentiment, there are other buyers who are swooping in trying to buy the low.
Don't do that. You'd be trying to catch a falling knife.
You need to be protecting yourself from that blade. I've got protective puts in my portfolio right now.
For what it's worth when I do that, I try to look at a sector that looks riskier. Because I'm not just protecting against the S&P 500, I'm protecting against what's going to lead the S&P 500 down.
So that brings us back to these regional banks - NYCB, RF, M&T Bank Corporation (MTB), Citizens Financial Group Inc. (CFG); you can go down that list.
But, of course, those names all comprise the KRE, so this is a time to pull out the old K.I.S.S. adage - Keep It Simple, Stupid.
To zero in on the KRE for this, I'm looking out to June and July, because this is a trend that will continue to develop.
Volatility's going to be high here, so you're not going to get cheap options in this area of the market.
But if you look out to July - which I have a position open for - and you at the 40s, you're going to be able to get a little bit of a bargain.
That said, one other place you can look is the ProShares UltraShort Financials ETF (SKF)...
This is an inverse of the XLF - it has insurance companies, big banks, and small banks.
In terms of the fundamental picture, this is a good representation of confidence.
Make note that it is trending higher. You've got support from the 50-day moving average (MA50), and you're breaking above the MA200 and the MA20. (As shown by my haphazard, John Madden scribbles on the above chart.)
I've got a target around the $25 level for this right now with a 10% stop loss.
You can trade options on this if you want, but honestly, the reason I'm putting this in front of you is in case you're looking for something that moves a little slower.
But it's important that you're at the very least aware of the momentum gathering around regional banks as these earnings announcements continue.
Even if they're positive, the fears of a recession looming ahead will likely still prevent the KRE and its components from rising.
And as we've seen from FRC, there's plenty of room for the negative to seep out to make things worse.
I'll keep looking at this sector like a hawk to try to pinpoint the best times and places to attack.
When I find them, you'll know.
The post You need these fireproof trades while the regional banks burn 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.