SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE) — The banking sector led Thursday’s rally, up 2.1% on positive results from the Federal Reserve’s stress tests and an easing in the U.S. dollar.
News of share buybacks and dividend programs from big guns like Citigroup Inc (NYSE:C), Morgan Stanley (NYSE:MS) and American Express Company (NYSE:AXP) also contributed to gains. If we look a little deeper, though, the regional banks, as represented by KRE, showed even greater strength.
Below is a ratio chart where I divided KRE by SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Ratio charts are a powerful tool to gauge relative strength in a stock or sector.
After underperforming SPY for a year, KRE saw one more bout of weakness in January before changing direction and going into relative strength mode. Over the past couple trading days, KRE pushed past an important diagonal resistance line, making a new higher high on this chart.
On the daily chart below, we see that Thursday’s 2.6% rally, which came on healthy volume, pushed KRE past a horizontal resistance line around $41.30, which has been in place since July. Also note the higher lows from January versus the October capitulation low.
From a risk management perspective, I would be remiss not to point out the March 17-18 FOMC meeting. The language employed by Fed Chair Janet Yellen could make or break an immediate bullish run in regional banks. Short-term traders could try to play KRE on the long side for another couple of points between now and Wednesday. More tactical traders may want to wait until after the meeting.
KRE looks constructively positioned to rise to the $44 area in coming months. A post-FOMC sell-off would likely offer an even better buying opportunity.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
