Regional Banks Weaken Against Larger Financial Stocks

Investors still should favor bigger banks despite exposure to Europe

   

Regional Banks Weaken Against Larger Financial Stocks

“Your big opportunity may be right where you are now.”
– Napoleon Hill

With what appears to be a legitimate recovery in bank stocks and the broader financials industry under way, it’s worth taking a look at the best way to play financials if you believe — as I do — that 2012 likely is a year of reflation similar to 2003 and 2009.

On first blush, it might appear to be “safer” to invest in so-called regional banks, which are more sensitive to domestic U.S. growth than overseas financials given exposure to Europe. However, money seems to actually favor global banks.

KREXLF 300x164 Regional Banks Weaken Against Larger Financial Stocks
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Take a look at the price ratio of the SPDR S&P Regional Banking Index ETF (NYSE:KRE) relative to the Select Sector Financial SPDR (NYSE:XLF). The KBW is made up of 71 regional bank stocks, including Regions Financial (NYSE:RF), Suntrust (NYSE:STI) and BB&T Corp. (NYSE:BBT). As a reminder, a rising price ratio means the numerator (KRE) is outperforming (up more/down less) the denominator (XLF).

Think of this ratio as a way of seeing if investors in the financials sector prefer smaller, U.S.-sensitive banks versus larger, global financial institutions.

There was a significant period of strength that kicked in around October as the “fall melt-up” began, but that trend seems to have abruptly reversed in early January 2012, with larger-cap financials performing better than regional banks.

The reason for this likely has to do with the idea that European banks are now recapitalized effectively through the European Central Bank’s Long-Term Refinancing Operation of cheap money, which in turn is causing investors to be more bullish on the global financial system.

While I do suspect that in general the entire financials sector can outperform the broader stock market into the end of the year, for now at least it seems that positioning into large-cap financials — which were most sensitive last year to volatility and a potential global market seize-up — might be where money is flowing on better European data.

The author, Pension Partners, LLC, and/or its clients may hold positions in securities mentioned in this article at time of writing. The commentary does not constitute individualized advice. The opinions herein are not personalized recommendations to buy, sell or hold securities.


Article printed from InvestorPlace Media, http://investorplace.com/2012/03/regional-banks-weaken-against-larger-financials-kre-xlf/.

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