Regional banks are feeling the heat from investors…
The mid-March collapses of Silicon Valley Bank and Signature Bank kick-started the trouble. And the fall of First Republic Bank brought this space back into the spotlight last week…
The SPDR S&P Regional Banking Fund (KRE) is down more than 40% since early February.
Investors are clearly shaken. And on every sign of weakness, regional-bank stocks tumble.
On the flip side, exploiting weakness is a short seller’s favorite pastime…
Short selling is a simple concept to understand. An investor bets against a stock he thinks will fall. And he hopes to book a profit when the stock trades at a lower price in the future.
With so much uncertainty… the regional-banking space is full of short-selling targets.
Now, more than ever, it’s critical for investors like us to know which banks are under threat. So today, I’m “pulling back the curtain” to show you how the Power Gauge can help…
In short, the Power Gauge includes a screener that can help us focus on specific criteria.
For example, we can look at all the banks with a “very bearish” grade in the short interest factor. And we can search for weak ratings in the relative strength over the past month.
Here’s what I found when I ran this search last Tuesday morning…
As you can see, 18 bank stocks met my criteria. And none of them were “bullish” overall.
You’ll also notice that one bank didn’t have any price action that day – First Republic Bank (FRC). That’s because it was no longer trading at all…
As we now know, First Republic became the second-biggest bank failure in U.S. history. And megabank JPMorgan Chase (JPM) struck a deal with the government to “rescue” it.
Two other West Coast banks stand out in this list of big short-seller targets…
- PacWest Bancorp (PACW)
- Western Alliance Bancorporation (WAL)
The Power Gauge ranks PacWest as “very bearish” today. That’s definitely a stock to avoid.
The system’s “neutral+” rating for Western Alliance might seem like a good thing at first. After all, we’ve told you in the past that this rating generally involves an optimistic outlook.
But in this case, the real-world details matter. And Western Alliance is in a tough spot…
It suffers from the same overly tight margins as the now-failed First Republic. So any fast movement of investor capital out of the bank will act like a land mine on its share price.
The bottom line is simple…
I’m not wishing for another bank failure. I’m only following what the Power Gauge tells me.
A lot of short sellers are circling regional banks right now. That tells me the industry is still under threat. With all the ongoing volatility, it’s not time to go “bottom fishing.”
I recommend you steer clear of this space for now – especially the two banks I mentioned.
Good investing,
Pete Carmasino
