The tale of yesterday’s tape can be summed up as follows: bonds dipped and banks ripped. The 10-year Treasury yield tagged 3% for the first time in four years in a continuation of the bond market pricing in future Federal Reserve rate hikes. The biggest beneficiary to the bond price carnage (and launch in yields) has been bank stocks. Indeed, with red flashing across the board during yesterday’s stock sell-off, the SPDR KBW Regional Banking (ETF) (NYSEARCA:KRE) was one of the only ETFs finishing in the green.
The gains would have been more substantial were it not for the massive bout of profit-taking striking the industrial, basic materials and technology sectors. Earnings talk from such heavy hitters as Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Caterpillar Inc. (NYSE:CAT) and 3M Co (NYSE:MMM) disappointed the Street, leading to substantial sell-offs that seeped into the rest of the market.
Nonetheless, KRE was able to eke out a 0.66% gain (after being up 2% in early morning trading) in a show of impressive relative strength. Outside of the energy sector which has been buoyed by rising oil prices, KRE is the one of the only other industry ETFs that still sits above its 50-day moving average.
Like the broader market, bank stocks have been mired in a choppy trading range this year. On a positive note, yesterday’s rally was powerful enough to punch through overhead resistance, which brings the upper half of its multimonth range into play. Further strength in bond yields could help propel KRE back to its 52-week high of $65 over the coming months.
How to Bank on Bank Stocks
With an implied volatility rank of 25%, KRE options contracts can be scooped up on the cheap. A long vertical call spread is worth a shot. Buy the June $61/$65 bull call spread for around $1.90. The initial cost is the max loss and will be forfeited if KRE sits below $61 at expiration. The max gain is $3.10 and will be captured if KRE rises above $65 by expiration.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.