Shares in regional bank stocks have stabilized recently, but analysts say both technical and fundamental factors make it too soon to call a bottom in the sector.
The collapses of Silicon Valley Bank and Signature Bank sparked turmoil throughout the regional bank sector in March, necessitating government intervention. And while the worst of the crisis appears to have passed, the big-picture view suggests that investors would do well to wait before risking their capital on seemingly cheap regional bank stocks.
For one, picking individual stocks is always riskier than making broader, more diversified bets. It’s also the case that industry analysts had a consensus recommendation of Buy on Silicon Valley Bank right up until the moment it failed. Even the lone analyst who rated SVB shares at Sell was shocked by the speed of the bank’s collapse.
the most obvious way to wager on a sector-wide recovery. And by some measures, it does indeed look cheap. After all, the largest and most widely traded regional bank exchange-traded fund lost a quarter of its value during the first three months of the year – a period in which the broader market gained 7% on a price basis.
And yet while market participants remain rightfully jittery about deposit flight and interest rate risk, since March 20, KRE has traded essentially sideways.
Bulls would argue that the worst is over; that regional bank stocks have been sufficiently discounted to reflect their risks. It might even be time to go bargain hunting in the sector. Bears – and merely more cautious types – are understandably worried that there are other shoes to drop.
It’s a tough call for sure. If the idea is to buy low, regional banks as represented by KRE could offer a compelling entry point. Then again, putting cash to work in KRE at current levels might be what’s known on Wall Street as trying to catch a falling knife.
So which is it? Based on a technical analysis of KRE, and broader fundamental issues with regional banks, investors should probably look for outperformance elsewhere.
