By Full disclosure: While there are many ways to view the following, this article will deliberately view the matter from a bearish angle.
While some investors look to KRE—the SPDR S&P Regional Banking ETF—as a possible “long” prospect, especially once the Fed begins cutting rates, it’s essential to consider the bearish case, which opens up opportunities on the short side.
According to Bloomberg’s dire February bombshell, investors seem to ignore the “brutal reality” of delinquencies in the commercial real estate (CRE) market. Consider this:
Regional bank exposure to CRE is up to an alarming 28.7%, compared to a mere 6.5% held by large banks (according to JPMorgan).
The CRE market is a whopping $5.7 trillion, with regional bank portfolios making up 54% of loans.
According to the National Bureau of Economic Research (NBER), an estimated 385 regional banks may experience failure if CRE loan defaults persist at the current rates.
The Technical Picture: Bullish Recovery or Lehman Moment?
KRE’s recovery began as soon as the Fed stepped in to put out fires in last year’s banking crisis using its Bank Term Funding Program (which expired on March 11). KRE’s dismal performance against the S&P 500 and the broader Dow Jones U.S. Banks Index ($DJUSBK) reflects the dire situation that regional banks face due to their CRE exposure (see chart below).
CHART 1. WEEKLY CHART OF KRE. Note KRE’s underperformance against the S&P 500 and the Dow Jones U.S. Banks Index.Chart source: StockCharts.com. For educational purposes.
The Near-Term Perspective
KRE’s price is rising within an uptrend channel (see black dotted lines in the daily chart below), but the momentum appears weak.
The falling On Balance Volume (OBV) line indicates that negative volume has exceeded positive volume. The Chaikin Money Flow (CMF) has fallen below the zero line, indicating that selling pressure has carved a hollow space beneath the foundation of KRE’s rise.
CHART 2. DAILY CHART OF KRE. While KRE’s rise within a trend channel might look like a steady yet guarded recovery since its most recent drop, if you examine momentum indicators, they reveal intensifying selling pressure, which could hold back bullish momentum.Chart source: StockCharts.com. For educational purposes.
If you want to go short, you’re waiting for the price to pierce the bottom of the channel (see blue circle) before entering a short. If you go short, three targets should be immediately clear (stop loss should be placed at the top of the channel):
Target 1. The most recent swing low of $45.31
Target 2. Previous resistance at $44.75 (which may become support)
Target 3. Previous resistance at $43.50
These levels don’t reflect the grim fundamental readings should the ultra-bearish predictions unfold. They represent the lower-hanging fruit ideal for a bearish swing trade. Should the sub-sector unfold like the ultra-bears envision, then you would look to the weekly chart to plot your target based on longer-term support or resistance levels. KRE’s chart isn’t there yet, so sticking with the easy target is better.
The Bottom Line
The case of KRE may (or may not) be a glaring testament to the folly of mainstream optimism. With the Fed playing puppet master and investors turning a blind eye to the looming catastrophe in commercial real estate (CRE) delinquencies, the scenario seems ripe for a reckoning. If the alarmist bears are correct, then those betting on a bullish resurgence are playing with fire.
The actual play here may be on the short side. If a systemic crisis unfolds as the ultra-bearish forecast, positioning yourself on the right side of the market means leveraging the crushing force of the trend rather than becoming its victim.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.