The Only Way You Should Bank on KRE

by Tyler Craig | September 23, 2013 1:36 pm

After leading the market higher for the first two-thirds of the year, the financial sector is stumbling. Regional banks in particular just can’t catch a break, completely missing September’s stock surge.

Maybe it’s a case of having run too far too fast, or maybe we were just overdue for some sector rotation. After all, financials were leading for some seven months. Usually sector leadership only lasts three to six months before money rotates elsewhere.

One of my favorite indicators for assessing the relative value of one stock or sector vs. another is relative strength. In addition to adding color to the analysis, it also says something regarding the opportunity cost of an investment.

For example, making a 10% return in a particular stock is great, but not so great if the broader market was up 20% over the same time frame. The more often you can place yourself in leading stocks or sectors, the more profitable your ventures will be.

Recently the comparative relative strength (CRS) of the SPDR Regional Banks ETF (KRE[1]) sunk to a new three-month low. At the same time, its absolute price performance has been plagued by weakness. The 20-day moving average is declining steadily and now the 50-day moving average is rolling over.

With today’s downdraft, the pivotal $35 support zone is being tested yet again. Worse yet, we’ve seen a duo of distribution days during the latest downswing.

KRE chart

<em>Source: MachTrader</em>

The easiest takeaway from the persistent deterioration in banks is to avoid entering new bullish plays in the space for now. If you’re itching for a stock to buy, focus on one of the newer leading sectors like semiconductors or oil services or industrials.

Sure, money will undoubtedly come back to financials at some point. But until then, steer clear.

On the other hand, if you think a larger market correction is looming and you want bearish exposure to a weak area like KRE, consider the following bearish trade.

Enter the November 36-33 put spread by purchasing a Nov 36 put and selling a Nov 33 put for around $1.15 debit. The max risk is limited to the initial debit paid and the max reward is limited to the distance between strikes minus the net debit, or $1.85.

If you’re seeking additional confirmation before pulling the trigger, you could wait until KRE breaks the $35 support zone.

At the time of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. KRE:

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