Why Regional Banks ETF (KRE) is the Market’s Prodigal Son

Michele Schneider

We thought that the Regional Banks ETF (KRE) could toprock or continue breakdancing from its already upright position.

And he did for a day, but not Wednesday.

In fact, KRE’s moniker as the Prodigal Son, typically works out as well-deserved.

In the Bible, the Prodigal Son had a loving father, a good home, provision, a future, and an inheritance, but he traded it all in for temporal pleasures.

As a result, he came home penniless and asked for forgiveness, which his father granted him out of compassion.

This week, JP Morgan (JPM) posted extraordinary corporate earnings. 

Aided by the rebound in trading revenue, the strong results in trading helped offset the impact of compressed margins across retail and commercial banking businesses as interest rates dropped.

bank stocks investor image

So, the Federal Reserve is the father who has given money to the banks through not only low interest rates, but also, through the billions they have added to the financial markets through repos. 

Despite the repos, the Regional Banks ETF (KRE) which represents the smaller banks and not JP Morgan, appears to have slinked home in trouble once again.  

Will forgiveness come as easily this time?  Here’s a chart of KRE and the Regional Banks:

regional banks etf kre analysis sell forecast decline lower price year 2020

KRE broke below the 50-day moving average on Wednesday for the first time since October 2019.

That puts it in an unconfirmed caution phase. 

Furthermore, the magenta line or 10-DMA is negatively sloped and looking like it could cross below the 50-DMA.

The slope of the 50-DMA is neutral after having a positive slope.

Put this all together, and unless KRE and the banks can close back above 57.05, it probably means it’s selling time again.

KRE has served as a lead indicator in the past. Most noteworthy was back in October 2018, when the S&P 500 was making new all-time highs.

KRE was the first sector to sell off. And we know what happened next-a 20% corrrection took out a lot of profits, not to mention quieted all the so-called “geniuses” that appear in easy bull runs.

Under 56.00, especially on a closing basis this week, will spell trouble.

It will certainly put our Prodigal’s breakdancing hobby on hold.

So, watch KRE carefully, and should the Russell 2000 IWM, Transportation IYT or even Semiconductors SMH, also red today, follow in kind, be ready.

Remember, the Fed can only do so much in this economic environment without sparking… wait for it… stagflation.

S&P 500 (SPY) Another all-time high. 325.40 is key price support.

Russell 2000 (IWM) Made a new January high and now 165.67 is pivotal.

Dow Jones Industrial Average (DIA) Made a new all-time high. 288.15 is the level to hold.

Nasdaq (QQQ) 217.75 is support to hold.

KRE (Regional Banks) 57.05 is price resistance with 56.00 being the support to hold.

SMH (Semiconductors) After making a new all-time high it broke the 10-DMA today. The moth’s low or 139.77 important to hold.

IYT (Transportation) 198.50 is pivotal support.

IBB (Biotechnology) 120 is now pivotal.

XRT (Retail) 45.50-46.00 is pivotal resistance. 44.90 is the 50-day moving average.

Twitter: @marketminute

The author may have a position in the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.