There is a big catch-up trade brewing in the banking industry.
The big banks have already been working. In fact, most financials have.
JPM was one of the first Dow components back to new all-time highs. Goldman and Morgan are right there with it.
Meanwhile, Wells, Citi, and BofA either just resolved— or are on the cusp of resolving massive consolidation patterns.
And then there are the regional banks… most of which look nothing like the big guys.
They are still about 25% off their all-time highs. However, I'm betting they close that gap… and soon.
Here’s a chart showing the big banks vs the little banks.
Up until a few years ago, there was never any material difference between these trends.
But when the banking crisis struck, those with excessive lending exposure suffered significant valuation haircuts.
Regional banks, particularly those that managed their balance sheets poorly, became laggards.
Meanwhile, the large money-center financial institutions, with diverse revenue streams that rely less on traditional banking, continued trending higher.
I think this divergence is about to clean itself up… and regional banks are about to ramp higher.
Our Big 6 Bank Index has already paved the way for them, making new record highs. That’s exactly what I think the regionals do next. Here’s another way to view the two indexes.
The truth of the matter is that lower rates resolve all the balance sheet problems.
And groups that need lower rates continue to trend well. I’m talking about biotechs, speculative growth, housing, etc. What do they know about the bond market that we don’t?
I don’t really care but I trust the price action. As long as KRE is above the VWAP from the old highs, I’m betting on it going back there.
I think interest rates will become a tailwind rather than a headwind for these banks in the future.
And instead of being chronic underperformers, I’m looking for the regionals to be the beta trade in financials.
It’s already working. We bought calls in the index looking for a textbook bull flag breakout a few weeks back. We got it almost immediately, sold a quick double, and took the free ride. Our remaining calls are up about 200%.
