A great thing just happened for the regional banks this morning as Steven Mnuchin was named as President-elect Trump’s Secretary of the Treasury.
The ex-hedge fund manager and former executive from Goldman Sachs Group Inc (NYSE:GS) made a point during an interview on CNBC this morning to talk about the administration’s plan and its potential positive effect on the regional banks to do better business.
Thus, the regional bank stocks are outpacing the larger financials by 41% in trading today. The move pushed the SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE) to new all-time highs, which is great for everyone except one group: the shorts.
Short sellers have been heavily betting against the regionals for some time. In some cases, the bearish bets against some regionals are higher than 10 times the average daily volume.
The excessive short interest in the sector already made it ripe for a short squeeze. Now, Mnuchin has added the fundamental catalyst that is triggering a short covering rally within regional bank stocks.
The following three regional banks are high on the list of potential beneficiaries from a continued short squeeze rally.
Regional Bank Stocks on the Rise: Bank of the Ozarks (OZRK)
With a short interest ratio of 9.2 times its average daily volume, Bank of the Ozarks Inc (NASDAQ:OZRK) isn’t even among the largest 10 short positions within the regional bank sector.
What makes OZRK stock stick out is the fact that the short positions account for 18% of the stock’s outstanding shares, or float. This means that shares must change hands more frequently for the short positions to get covered.
Bank of the Ozarks was already a short squeeze candidate, given the company’s improving technicals. For more than a year, shares have lagged the regional bank index. Now, with the November rally helping, OZRK shares entered a bullish technical outlook as the 50-day moving average and other key technical signals have indicated building momentum.
Watch for a break above $49 to start shaking more of the short sellers out of the Bank of the Ozarks shares, sending them into the market as stock buyers. Given that we’re seeing daily volume start to trend higher, it will make closing the short positions more expensive for these bears, benefiting those of us already holding the stock.
Regional Bank Stocks on the Rise: F.N.B. Corp (FNB)
F.N.B. Corp (NYSE:FNB) is another of the regional banks that has lagged its peers. Year-to-date, the company’s shares are trading about 15% higher, compared to 25% for the S&P Regional Bank Index. The recent November rally has helped improve the technical outlook for the shares, boosting our model’s technical target to $18, or about 17% higher.
The technical shift is fueled also by earnings results that have met or exceeded analyst expectations in 17 of the past 20 quarters. While this is less tracked by Wall Street pros, the consistency of the bank’s earnings reports has helped push shares higher.
From a technical perspective, F.N.B. Corp just broke into a long-term bull market with two closes above its 20-month moving average. This will continue to build FNB’s momentum and should scare the shorts out of the bushes.
The hold and (now) bounce from the technically significant $15 price level will act as a catalyst for further short covering. This will fuel FNB shares to the $18 mark.
Regional Bank Stocks on the Rise: United Bankshares (UBSI)
After rallying more than 25% in the past month, United Bankshares, Inc. (NASDAQ:UBSI) is now one of the relative strength leaders within the regional bank sector.
From a fundamental perspective, United Bankshares’ earnings reports have been lackluster, missing and exceeding analyst expectations on a regular basis. This is one reason that every last Wall Street recommendation for this stock is in the “hold” category.
The technical traders are keying off UBSI’s recent success, though, as volume has been heavier on up days, suggesting that there is a crowd of buyers. But this hasn’t stopped the short sellers from building a bearish position on United Bankshares that represents 18 times that average daily volume and 14% of the stock’s float.
The high short interest ratio and short/float ratio tells us that the bearish short sellers must start buying soon to close out their losing positions. Today’s fundamental development will help move the price above $47, which is where we see the short covering rally really kicking in.
As shares of United Bankshares press to new highs, the shorts should add fuel to the rally, moving UBSI closer to our target of $53, or about 15% higher.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.