Interest rates and upcoming earnings reports have the traders looking at the Regional Bank sector with a skeptical eye. For the last three months, this sector has knocked the cover off the ball as these stocks posted a 30%-plus rally. The rally, driven by higher rates and the Trump victory, was fast out of the gate and then slow since the beginning of December as the sector has traced sideways and consolidated for the last month-and-a-half.
With earnings approaching and the yield on the ten-year showing some signs of declining, traders are flooding our of the Regional Bank stocks, but there are a few that will fall right into perfect “buy the dip” technical plays. Today’s three big stock charts look at the SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE), PNC Financial Services Group Inc (NYSE:PNC) and Fifth Third Bancorp (NASDAQ:FITB) as three potential “buy the dip” plays.
SPDR KBW Regional Banking (ETF) (KRE)
The fundamentals for the Regional Bank sector got stronger last year when the Federal Open Market Committee started their rate hike maneuvers. Currently, three rate hikes are expected in 2017, however the timing of the hikes remain in question as Fed Funds futures are suggesting that the first hike could come earlier in the year than expected.
Higher yields are helping the KBW Regional Banking ETF as the regional banks can cash in on higher rates with more profitable balances sheets. This has been the driver behind fundamental expansion in the sector. In addition, the sector also has the benefit of strong technicals.
KRE shares continue to trade well above their 50-day moving average, which is also trending higher. A double bullish mark for the technicians. In addition, the recent consolidation has helped KRE shares to avoid becoming overbought, another point attracting the technical buyers.
The recent selling represents profit-taking ahead of the earnings season, but is matched with potential buying power as traders have been waiting for an opportunity to get into this sector before the next rally launches.
Watch for KRE shares to get some strength as they approach the $53-level as this will combine an oversold signal with strength from the rising 50-day at the same time making for a potentially nice entry for the short- and intermediate-term traders.
PNC Financial Services Group Inc (PNC)
PNC Financial Services dropped their quarterly earnings results on the market last Friday, beating analyst expectations and providing guidance that didn’t disappoint the Street. PNC stock received an upgrade after the earnings results. Despite the news and the upgrade, shares are trading almost 5% off their highs following the earnings.
The selling is likely a case of antsy traders that have been holding the stock through its consolidation trying to lock-in a profit; however, the technical support below PNC’s stock prices suggests that we may see a buying opportunity ahead of a reversal.
The 50-day moving average of PNC Financial Services’ stock is currently at $112.25. This line in the sand will likely provide an easy target for the technical traders to begin nibbling at new positions. Short sellers have been closing their bearish bets as the stock has been in decline, suggesting that they may also help with a short-term reversal. Set the alerts for $112.25 as a potential short-term buying price for PNC.
Fifth Third Bancorp (FITB)
Another regional bank located in the Cincinnati area is Fifth Third Bancorp. This regional has been a leader in the banking sector as their work on margins during the low interest rate environment is now set to help accelerate stock price when rates are acting as a tailwind.
FITB shares are following the lead of the sector as they are now trading off of their consolidation range highs, but also set to benefit from support from their 50-day moving average. In addition to the technical support, Fifth Third Bancorp shares are also sporting a high short interest ratio with 5.7 times the average daily volume of the stock tied-up in bearish short bets.
The short-term selling is likely to lead to a test of the 50-day average ahead of FITB’s earnings call on Jan. 24. Our experience is that a successful bounce from this trendline will get the short sellers engaged in closing out their positions, sparking a short covering rally. This rally may be even more enthusiastic if it occurs close to the company’s earnings announcement.
Watch for a short-term test of the 50-day to lead to a volatile rally ahead of, or just after, Fifth Third Bancorp’s earnings date on Jan. 24.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.