Regional bank ETF hits record 'relative' low after First Republic's failure, but momentum is shifting to the bulls

By Tomi Kilgore

New York Community Bank's stock is one of three KRE components that is bucking the negative trend by rising above both short- and long-term trend trackers

Regional bank stocks took a broad beating Monday in the wake of First Republic Bank's failure, and continue to underperform the broader stock market by their widest margin in history, much worse than they did during the 2008-2009 financial crisis.

While investors continue to reject the sector, on its own and on a relative basis, there is perhaps a technical silver lining, in the form or "bullish technical divergence," as shown in the chart below.

The SPDR S&P Regional Banking exchange-traded fund (KRE) fell 2.8% to close at $41.46, with 135 of its 143 components losing ground, even as the S&P 500 index slipped less than 0.1%. So this year, the KRE has tumbled 29.4% while the S&P 500 has gained 8.6%.

On a relative-strength chart, in which the performance of the regional bank ETF (KRE) is compared with the S&P 500 since the KRE's inception in June 2006, the KRE hit a record low on Monday.

Basically, as cheap as the KRE has gotten, investors still aren't showing any interest in trying to pick a bottom.

Keep in mind that during the 2008-2009 financial crisis, the S&P 500 actually fell more than the regional-bank sector in 2008, before rebounding in 2009. And on a relative basis, the KRE didn't bottom versus the S&P 500 until the second half of 2011.

What's also telling, is that the KRE's performance relative to the broader financial sector also hit a record low.

That depicts a real disconnect between what investors think of the smaller regional banks compared with the S&P 500's bigger banks. The Financial Select Sector SPDR ETF was down Monday, but just 0.3%.

As Paul Christopher, head of Wells Fargo Investment Institute, put it, while "we may not have seen the last of the failures of the small and regional banks," he's not expecting a larger banking crisis given that the larger "universal banks" have more diversity in their funding sources, are well capitalized and follow stringent liquidity requirements.

Christopher's sentiment was echoed by Jason Pride, chief investment officer of wealth management services company Glenmede: "While there appears to be some localized issues in some regional banks, the likelihood of a systemic banking event appears contained."

As the following chart shows, the KRE continues to follow the same downward path that it has taken since SVB Financial Group first made its troubles known to the public in early March.

There is a bright side, however.

While the KRE has fallen, a momentum indicator known as the Relative Strength Index (RSI) has been rising. The RSI tries to gauge momentum by comparing the magnitude of up days with the magnitude of down days over a certain time.

When the RSI trends higher while prices continue to trend lower, many chart watchers on Wall Street call that "bullish technical divergence." Typically, the divergence is resolved in the direction of the RSI rather than the price.

A few KRE stocks are showing some bullish technical readings

Meanwhile, despite all the sector negativity, a handful of the KRE's 143 components have bucked their peers by showing actual technical strength, and not just on a relative basis.

For example, the KRE is well below its 50-day moving average (DMA), or short-term trend tracker, that extended to $48.16 on Monday, according to FactSet. But it is even further below its 200-DMA, which is seen by many as a dividing line between shorter- and longer-trends, that extended to $58.60. .

The stocks of three KRE components closed Monday above both their 50-DMAs and their 200-DMAs, while another is below its 50-DMA but above its 200-DMA, and another closed just above its 50-DMA but below its 200-DMA. All five of those stocks have posted year-to-date gains.

New York Community Bancorp's stock (NYCB) rose 0.2% to an 8 1/2-month closing high of $10.71 on Monday, and was by far the KRE's best year-to-date performer with a 24.5% rally. The Hicksville, N.Y.-based bank's stock has been rallying since its subsidiary, Flagstar Bank, assumed in mid-March most of failed Signature Bank's deposits and some of its loans.

The stock (NYCB) soared 31.7% on March 20 after the agreement was announced, and ran up another 16.3% on Friday to an eight-month high after the bank reported first-quarter results that were well above expectations and deposits that grew 44.5% from the end of December.

The stock's 50-DMA was at $8.70 and the 200-DMA was at $9.24.

Meanwhile, Bancorp Inc.'s (TBBK) stock fell 3.7% on Monday to $30.62, but has gained 8.3% this year to be the KRE's second-best year-to-date performer. The stock closed above its 50-DMA, which came in at $30.00, and its 200-DMA, which extended to $27.84.

Hilltop Holdings Inc.'s (HTH) stock lost 1.5% to $30.55 on Monday, but was up 1.8% this year. It closed just above its 50-DMA at $30.49 and was still well above its 200-DMA, which came in at $29.19.

Pathward Financial Inc. shares (CASH) slipped 0.4% to $44.34, but has advanced 3.0% this year. It closed just below its 50-DMA at $44.52 but finished the day above its 200-DMA at $41.39.

And Axos Financial Inc.'s stock (AX) declined 1.6% on Monday to $40.02 but was still up 4.7% this year. It closed just 2 cents above its 50-DMA but 43 cents below its 200-DMA.

Triumph Financial Inc.'s stock (TFIN) was the only other KRE component that has gained in 2023. It shed 1.4% on Monday to $51.25 but has gained 4.9% this year. But the stock closed below both its 50-DMA at $56.91 and its 200-DMA at $58.37.

-Tomi Kilgore

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05-02-23 0725ET

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